economic and social costs of the deficits of competences in romania

Contents Romania within the European Union: the Integration Quality Desideratum under the Proactivity Condition Horaţiu Dragomirescu / 7

Romania’s Economic Growth During 1990-2006 and in the First Semester of 2007 Vergil Voineagu, Daniela Ştefănescu / 15

The Components of Bid-Ask Spread for BSE Stocks Bogdan Negrea, Lucian Ţâţu / 27

An Analysis of the Convergence Process in the East and Central-European Countries Daniela Livia Traşcă /33

Evolutions of the Convergence Towards the Accession Conditions to the European Monetary Union of some Countries Recently Integrated into the European Union Radu Stroe / 37

The Impact of Accession to the European Union on the Romanian Capital Market Dragoş Mînjină, Andrei Stănculescu / 41

Applying the Binomial Model in Case of Evaluating Certain Derivatives Dan Armeanu, Carmen Obreja / 49

The Forex Market – An Alternative to The Stock Market Oana David / 55

Ethical Issues in Marketing Regarding the Integration of Romania in the Economical and Social Structures of European Union Mirela Stoian, Anca Elena, Rădulescu / 61

Comparative Approaches Regarding Fiscal Systems in European Union Iulian Braşoveanu, Laura Obreja Braşoveanu, Cristian Păun / 65

Determinants of Economic Growth and Romanian Competitiveness. An Empirical Analysis Dan Cătăneţ, Alina Cătăneţ, Cătălina Radu / 75

Commercial Liberalization and the Restructuring of the System of Companies from Romania Ilie Gavrilă, Tatiana Gavrilă / 83

The Sustainable Use of Natural Resources and Waste Management – Priority Area for Environmental Policy in The European Union Camelia Raţiu –Suciu, Valentina Elena Târţiu / 93

Costs, Benefits and Individual Preformance Indicators of some Important Public Institutions in Romania in the First Years After EU Joining Aurelian Virgil Băluţă / 101

SME’S as a Support Factor for Progress Liviu-Cătălin Moraru / 107

Human Resource Contributions to the Organizational Strategy. The Romanian Banking Sector and The Integration to the European Union Anca Bogdan / 113

Romania in the EU. The Quality of Integration. Growth. Competence. Employment

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The Effects of Monetary Policy Upon the Real Economy Anca Maria Gherman / 123

Marketing and Sustainable Tourism Silvia Muhcină / 127

Trade and Environment – Opportunities and Risks Florina Bran / 133

Transforming Ecological Effects in Market Signals by Awareness Raising Ildiko Ioan, Geani Grădinaru / 137

Capital Structure and Financial Performance – Related or Independent Variables? Empirical Study on Romanian Companies Listed on Capital Market Ingrid Mihaela Dragotă, Andreea Semenescu, Dan Traian Pele, Carmen Lipară / 143

Romania and the Fiscal Harmonization in the EU - The Case of Indirect Taxes – Anton Comănescu / 151

Development of Higher Education in Romania Ion Plumb, Andreea Zamfir / 157

Decision Platform - The Public-Private Interference Ioana Teodora Dinu / 165

Investing in People in The Actual Romanian Labor Market Mirela Ionela Aceleanu / 173

Employment and Labor Market Policies for an Ageing Workforce Alina Ştefania Creţu, Roberta Calinici / 177

European Trends in the Configuration of Entrepreneurial Culture in Romania Mircea Alexandru Dinu / 183

Regional Analysis of Income Inequality. The Case of Romania Delia Ţâţu, Răzvan Bărbulescu / 189

The Role and Economic Impact of Remittances Carmen Năstase, Carmen Boghean, Florin Boghean / 193

Demographic Prognosis of Metropolitan Areas. A Study of Romania’s Integration Quality into the European Union Grigore Ioan Piroşcǎ, Daniela Virjan, George Laurenţiu Şerban-Oprescu / 199

The Quality of Integration, Competence and Romanian Convergence in a Knowledge-Based Society. Lisbon’s Targets and the European Common Objectives for Education and Life-Long Learning Marta-Christina Suciu / 207

Contemporary Fiscal Policy under the Incidence of the New Paradigm of Economics, Theoretical-Methodological Pluralism

Niţă Dobrotă, Cornel Ionescu / 219 Responsibility and Social Cohesion – Estimation Criterion for Economic and Social Integration Mariana Ioviţu / 229

Theoretical and Applied Economics. Supplement

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Conceptual Opinions Concerning the Human Factor Constantin Roşca, Doina Roşca / 233

Contribution of Structural Elements in GDP Formation and Increase Ion Enea-Smarandache, Andreea-Maria Ciobanu / 239

The Connection Between International Exchanges and Economic Development

Ion Bucur / 249 The Scientific Research and the Economic Progress Elena Ciucur, Dumitru Ciucur / 255

Economic and Social Costs of the Deficits of Competences in Romania Alecxandrina Deaconu, Cornelia Lefter / 265

Behavioral Quality and National Image Magdalena Iordache-Platis / 271

The Enterprise in the European Union Paul Tănase Ghiţă / 275

The Last “Revolution” on Transportation Ilie Rotariu / 287

Certain Theoretical Aspects Regarding the use of the Dynamic Series for Economic Analysis Constantin Anghelache, Constantin Mitruţ / 293

Policy Making and the Spheres of Influence in the European Union Andrei Hrebenciuc / 299

A Comparison between Calibration and Bayesian Approach on a Real Business Cycle Model Petre Caraiani / 307

Effects of the Energy Crisis on Biofuel Production and Consumption in the European Union Anca Dachin / 315

The Agricultural Products Market: The Impact of Agricultural Products Characteristics over the Trade Vincenţiu Vereş, Maria Mortan / 323

The Internal Costs of the Firm Monica Dudian, Aurelia Ştefănescu, Rodica Gherghina, Ioana Duca / 331

Certain Aspects Concerning the Analysis of the Chronological Series of Moments Georgeta Vintilă, Mădălina Dumbravă / 335

Financial Leverage: Classic and Modern Approach-Case Study on the Companies Listed on Bucharest Stock Exchange, Equipment Section Cristina Maria Triandafil, Petre Brezeanu, Catalin Huidumac / 339

The Research Methodology for the Perception of Underground Economy in Romania in the Context of the European Integration Cristina Covaci (Voicu) / 347

The Quality of the Accounting in Formation Provided by the Financial Reporting – Factor for the Economic Growth and the Entities Competitiveness Maria Manolescu, Aureliana Geta Roman / 355


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International Dimensions of Human Resource Management Cristian Marinaş, Aurel Manolescu / 361

Contributions Referring to a Territorial Model for Development of the Economy Based on Knowlegde (Methodological Framework) Mihail Dumitrescu, Lavinia Ţoţan / 367

An Analysis of the Re-Allocation of Investors Between Foreign Direct Investment and Foreign Portfolio Investment after European Integration Gabriela Prelipcean, Elena Hlaciuc, Mircea Boşcoianu, Mariana Lupan / 373

Remittances Statistics in the Republic of Moldova Eugeniu Aftene, Ion Pârţachi / 381

Using the Data Warehouses in the Adoption of Decisions Related to Sales Policies Mihai Păunică, Eugeniu Ţurlea, Florinel Sgârdea, Aurelia Ştefănescu, Marian Liviu Matac,

Alexandru Manole / 389 Theory and Method in the Improvement of the Financing for the Academic Learning Institutions Mihai Păunică, Eugeniu Ţurlea, Florinel Sgârdea, Aurelia Ştefănescu, Marian Liviu Matac,

Alexandru Manole / 399

ROMANIA WITHIN THE EUROPEAN UNION: THE INTEGRATION QUALITY DESIDERATUM

UNDER THE PROACTIVITY CONDITION

Horaţiu DRAGOMIRESCU Ph.D. Professor

Academy of Economic Studies, Bucharest

Abstract. Romania’s integration into the European Union is a complex, long-term process, entailing expectations and requiring contributions from the whole range of the Romanian society components; integration engenders opportunities, but also conditio-nalities, potential advantages, but also inevitable costs.

Given its crucial importance, the quality of this process should be subjected to explicit consideration, from a pragmatic point of view, by formulating and operationalising valid answers, to the question as to “How do we get integrated?”

At present, when one year has already elapsed since the adherence, as for the approach of Romania’s European integration issues is concerned, certain inertial effects of the dominant logic of consistency with the accession criteria, peculiar to the candidate country previous status, are still manifest. As against the anchor of the integration quality, pertaining to the post-accession development, there is suggested, as an alternative, the adoption of the dominant logic of proactivity; accordingly, the main types of competences corresponding to the latter are highlighted: the strategic thinking competence, the negotiation and multi-actor decision-making competence, the inter-cultural communication competence, and the project-based, collaborative action competence.

Key words: European integration; dominant logic; consistency; proactivity;

competences. JEL Codes: F15, O5

Introduction Romania’s European integration issues have lately lain at the top of the public agenda

priorities. Due to its large scale, high complexity and demanding requirements to be met, the country’s European integration entails a long-term commitment and coherent actions from the domestic actors expected to uphold, as major stakeholders, its smooth unfolding.

In Romania, the European integration has been, ever since the 1989, December, onset of the transition period, a natural expectation, stemming from the aspirations towards the high standards of economic development and welfare, as well as the Western civilisation values. In the post-war Europe, these standards have been proclaimed and promoted within the institutional framework of the European Economic Communities, established through the Treaty of Rome, signed at 25th March, 1957, by the representatives of Belgium, France, Germany, Italy, Luxembourg and the Netherlands, and having reached, after 6 successful waves of enlargement, the present configuration of the European Union with 27 member states.


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Speed and quality aspects of the European Union’s enlargement The European Union’s enlargement has been both a necessary and beneficial

evolution, targeted at the advance of the European grand project, which has brought the shape of the united Europe’s political map closer and closer to that of its geographical one (Wyplosz, 2006).

The enlargement rationales are both economic and political (Long, 1997); this process extends the single market space, enhances the European economies’ development potential, facilitates the free circulation of goods, capitals, persons and ideas among the member states, takes stock of their cultural diversity and also offers stronger guarantees for peace and security on the continent.

The experience with the stages already completed on the road of the European Union’s enlargement and the next steps to be undertaken towards the accession of candidate states of the West Balkans region (Rehn, 2006) reveals the importance of the correlation between two key aspects, namely the speed of the enlargement process, and its quality, to be jointly taken into account in order to pertinently understand and manage the respective process (Verheugen, 2000).

The speed of enlargement depends on the absorption capacity, by the European Union, within a relatively short historical period, of a significant number of new members (Emerson, Aydin et al., 2006), concurrently with achieving economic and institutional reforms, including the recent signature of the Treaty of Lisbon (Office for Official Publications of the European Communities, 2007).

The quality of the enlargement process has been managed through monitoring, by the communitary bodies, of the progress and pitfalls encountered by the candidate countries, as pointed out in the regular country reports released by the European Commission; the accession criteria – economic, political and the community acquis adoption – established in Copenhagen in 1993, have been proved as valid and therefore will apply further on (Barnes, Randerson, 2006).

Retrospective view of Romania’s accession to the European Union under the

dominant logic of consistency Once Romania’s accession “If?” question got, in the mid ′90s, a positive answer from

the communitary bodies, the process of preparation for membership continued under the bearing of the “When?” question.

Romania’s advance along with its European path was landmarked by key moments such as: the coming into force of the Association Agreement to the European Union (1995, February), the submission of the official application for membership (1995, June), starting the negotiations with the European Commission (2000, February), the conclusion of these negotiations (2004, December), signing the Adherence Treaty (2005, April), and the adherence proper (2007, January the 1st).

Romania’s option for the integration into the European Union, as an expression of its national interest, gathered, from the outset, the consensus of the political forces, having also been supported by most of the population. Likewise, the necessity of a masterplan was consensually recognised, with a view to preparing the country’s accession to the European Union; hence, the Snagov Declaration was signed by the leaders of state and all parliamentary parties, followed by the adoption, by Government’s decree, of the medium-term development strategy (2001 - 2004), that was forwarded to the European Commission.


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The undertaking, during the period 2000 - 2005, of the steps stipulated by the roadmap to accession led to setting up the grounds for Romania taking up the status of member country of the European Union.

Tackled as prospects, accession and integration might have appeared, since awareness was not sufficiently clear-cut to the public, as facets of one desideratum only. Essentially, however, the two of them are altogether different, both as concepts and enterprises.

European integration was being initiated while Romania was still a candidate country, its form being one of “Europeanization”, with the meaning suggested by Pollak (2005); as arguments in this respect, one can quote the integration “islands” represented by partnerships between Romanian entities and their counterparts in the EU, the joint projects developed within the IVth, Vth and VIth Framework Programmes for Research and Development, the PHARE, TEMPUS, Socrates or e-Europe+ programmes, through the agency of which financial assistance was provided for the participation of organisations eligible in their candidate countries. In this way, Romanian organisations got acquainted with the rules of operation within the community, consortia with European partners were established, and significant learning outcomes occurred in terms of good practices, taking stock of the experience of cooperation acquired within joint projects. Nowadays, once the accession achieved, these integration “islands” are expected to get multiplied and consolidated – as Miles’s (2003) metaphor suggests – in form of “archipelagos” and “continents”.

The integration process will probably continue for 15 more years at least, and involves the Romanian society as a whole, with its various entities in the economic, social, technological, educational or cultural fields, that are engaged in the structured European dialogue.

The phenomenology typical of the respective process can be better understood by applying the concept of dominant logic, proposed by Bettis and Prahalad (1995). This concept can be defined as the modality in which decision-makers in organisations – and, one can infer, also in socio-economic macro-systems – use to represent, in forms such as mental models and cognitive maps, the operation of these systems, and in which they adopt major decisions regarding resource allocation.

As meeting the Copenhagen criteria involved mainly public institutions’ commitments, the stage of Romania’s candidacy to the European Union membership was marked by the dominant logic of the consistency with the accession criteria (Steunenberg and Dimitrova, 2007).

Through compliance with these criteria, legislative harmonisation is reached, and public policies coordination systems are set up among member states; however, the conditions so created, although stipulated as pre-requisites for one’s candidate country accession to the European Union, are far from being sufficient for the integration successful unfolding (Schimmelfennig, Sedelmeier, 2004).

Complying with community requirements and regulations, while being a potential enabler to competitiveness, does not actually generate it, though. Internalising community regulations does not automatically lead to new member states’ performances in line with the European partners’ ones, nor can it compensate the lack of vision and initiative in the former case; likewise, public policies, however accurately designed and coordinated, cannot substitute the micro-foundations of a sustainable economic growth.

The quality of Romania’s European integration and the dominant logic of

proactivity The core issues of the European integration concern getting Romanian companies fit

to cope with the internal market competitive pressure, reaching economic convergence Europe-wide, progressing towards the knowledge society and implementing the European social model.


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On the qualitative side, which, in the post-accession period, becomes essential, the management of the European integration process pre-supposes the formulation and the putting into action, by the Romanian society, of a valid answer to the question: „How shall we get integrated?” (Angelescu, Dinu, Dragomirescu, 2006).

The integration advantages may convert from potential to actual at the extent at each Romanian entity capitalise on the basis of their own strategies and to turn to best accounts the opportunities of the harmonised legal framework, as well as those offered by the European internal market, and the support obtainable from community assistance programmes.

A less-than-sufficient preparation for such an operation would lead to constrictive effects and high integration costs; in the latter case, Romania’s strengths would be limited to the size of its domestic commodity market or the facilities granted to foreign investors.

On the national scale, a year since the accession to the European Union took place, the concerns regarding integration reflect the inertial effects of the dominant logic of consistency with the accession criteria, although this logic became obsolete once the European Union membership status was obtained.

The vision and actions aimed at the successful European integration should be based upon an alternative dominant logic, that of proactivity, instead of the former one. The latter has the advantage of putting the integration quality into evidence as a key variable in the Romanian model of European development; adopting a pragmatic perspective with respect to the quality of the integration process appears to be both necessary and possible (Dinu, 2005).

Within a pragmatic approach of the integration quality, this process ought to be subjected to a cost-benefit type of evaluation, based on evidencing concrete results, and not only on the checking-up of meeting some formal criteria.

The post-accession development can no longer be steered through monitoring compliance, but through new member states’ conceiving and applying strategies and programmes within a vision stemming from their own interests and rendered compatible, in the same time, with the community objectives.

The dominant logic of proactivity appeals, on behalf of the actors promoting it, to four major categories of competences, namely, the strategic thinking competence, the competence of negotiating and decision-making in a multilateral framework, the inter-cultural communication competence, and, respectively, the project-based, collaborative action competence.

The strategic thinking competence, understood in the sense defined, among others, by Liedtka (1998) or Sparrow and Hodgkinson (2006), generally refers to the ability of any active entity to draw up its own vision concerning its future becoming, to implement it into objectives and programmes provided with adequate resources, and to consequently act in accordance with these assumed options.

”Not to act on the basis of a strategy represents a major vulnerability that, far form being justified by the increasing complexity of the business environment is enhanced by it. That is why, for Romanian enterprises, the manifestation of what can be called «strategic scepticism», reinforced by limitations of the certain conceptual abilities, but also by the easiest alternative of tactical improvisation, probably involves the highest risk of failure in the competitive race.” (Dragomirescu, 2003).

Should strategy be further understood as mere a foresight exercise instead of a vision-based commitment, there is a significant risk of persistent strategic scepticism. Should vision itself remain rather vague, given for instance the difficulty of reaching a minimal consensus among rather divergent options, its relevance will be questionable in terms of providing necessary the foundation for a viable strategy. Under such circumstances,


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recognition of the usefulness of strategy as managerial instrument would be undermined, leaving room for improvisation, for instance, through juxtaposing tactical steps. These steps, although often sought as easier to manage, can, at best, lead to partial, temporary advantage which is due mainly to contingencies and, therefore, can hardly become sustainable.

The competence of negotiating and decision-making in a multilateral framework plays an essential part in sustaining the active participation of a member state to drawing up the European Union policies, by reporting to their own interest and to the community objectives, which also raise the issue of finding new ways of undertaking the national sovereignty.

The contribution of the national representatives in different working or deliberative bodies of the European Union and the decisions adopted are mirrored in the operation the community structures which are concerned with the imperative of an increase in flexibility and timeliness, but also with that of a better management of the Union’s resources.

The inter-cultural communication competence is important as a pre-requisite for a sustained and efficient structured dialogue between the diverse entities in the Romanian society and their counterparts in other European Union member states.

The project-based, collaborative action competence becomes essential under the conditions in which the projects selected through competition make it possible the access to the European funding and provide cooperation opportunities between Romanian organisations and their European partners.

There is well known that rigidly structured, hierarchical organisations often encounter major difficulties with project-based work. Even though matrix-type configurations are adopted, which are specially designed to this end, their functioning is affected by the inherent internal mismatch, determined by the duality of power, exercised, vertically, through the chain of command, and horizontally, through the professional leadership of project managers.

With Romania, hierarchical tradition, typical of the industrial society, and further enhanced by the excessive centralisation of the command economy system, exerted its inertial influence in the transition period to the market economy, partially overlapping with the one of preparing accession to the European Union. As a consequence, both the capacity of promoting new projects as well as the one of implementing selected projects, absorbing European funds included, were significantly limited.

As this phenomenon is concerned, two possible explanations can be issued; on the one hand, it is typical of a hierarchical organisation to lean towards self-perpetuating, while a project unfolds in a “reverse counting” regime, as it has a precise termination term, after which it no longer functions.

On the other hand, project-based activities entail dedicated resources, while current activities within hierarchical organizations are generally subject to contingencies as to being allowed to access a corporate resource portfolio.

The insufficient absorption of European funds appears paradoxical, given the considerable financial needs encountered by Romanian organisations in their effort to cope with the challenges peculiar to both pre- and post accession development.

Basically, there is their insufficient capacity of promoting viable projects within the community programmes that accounts for this paradox. One can realise that a vicious circle takes shape, in the sense of self-limiting the access to the funds allotted through the multi-annual budgets of the European Commission, thus increasing domestic expenditures and unfavourably affecting integration pace and quality.

Hierarchical organisations got slowly adapted to project-based functioning, obstacles and distortions being encountered, giving birth to rather ad-hoc, empirical practices which


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occurred in environments not yet prepared to accommodate projects professionally managed.

In the table below, these empirical-like practices are compared to those pertaining to a genuine project management.

Comparison between empirical and genuine project management practices

Table 1 Characteristics Empirical project management

practices Genuine project management

practices Priorities as to promoting projects

Initiating new projects and fully spending the funds allotted to them appear as ends as such

- promoting projects with sound, feasible objectives; - keeping project objectives fulfillment on track and reaching the foreseen outcomes.

Access to resources for projects

Negotiated or competitive access of different projects to a corporate resource portfolio

Resources specifically devoted to each project

Key concerns in performing project management

Emphasis on assigning individual tasks to project team members and having their fulfillment monitored by the project manager

- project co-directorships or executive coordination groups; - emphasis on facilitating cooperation among project team members and articulating their respective contributions

Risks management Allegedly low - actually underestimated - failure risks appear as a strength of a project bid

Realistic estimation of failure risks, complemented by adequate risk management provisions

Ways of capitalising on experience gained from project-based activities

Individual knowledge, mainly tacit in form

Project memory: - tacit knowledge shared by project team members; - organisational knowledge repositories.

Source: based on Filip and Dragomirescu, 2006.

According to the revised Lisbon Strategy, promoting the knowledge society is a top priority for the European Union (Commission of the European Communities, 2005). Nowadays, it became a fact that filling the knowledge gaps also leads to having the development ones diminishing.

In this framework, mention should be made to the Romanian propensity towards the knowledge society (Dragomirescu, Filip, 2008), with respect to which the dominant logic of proactivity requires a high profile presence of Romanian projects in the communitary research, development and innovation programmes.

However, a fine tuning should be kept between intensifying the effort for knowledge generation and enhancing the internal capacity of knowledge absorption, while taking into consideration the latest developments occurred in science and technology worldwide.

Conclusions

Approaching Romania’s European integration by adopting proactivity as its dominant logic appears as a key condition for the successful unfolding of this process, the quality of which should be explicitly and pragmatically tackled in the framework of the national post-accession development strategy.


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Proactivity means taking well-grounded initiatives according to the national interest, sustained participation in joint projects along with European partners, promoting the structured dialogue and also meaningfully contributing to communitary policies design and coordination. Succeeding with Romania’s European integration requires leveraging domestic competences, both individual and organizational, as micro-foundations of the country’s own sustainable development, whith a view to progressing towards economic convergence, social cohesion and knowledge-based society Europe-wide.

Bibliography

Angelescu, C., Dinu, M., Dragomirescu, H. (editors) (2006). Romania and the European

Union: the integration quality, Editura Economică, Bucureşti Barnes, I., Randerson, C. (2006). “EU enlargement and the effectiveness of conditionality:

keeping to the deal?”, Managerial Law, 48(4), pp 351-365 Bettis, R.A., Prahalad, C.K. (1995). “The dominant logic: retrospective and extension”,

Strategic Management Journal, 16(1), pp 5-14 Commission of the European Communities (2005). “Working together for growth and jobs

A new start for the Lisbon Strategy”, Communication to the spring European Council, COM (2005) 24, Brussels

http://ec.europa.eu/growthandjobs/pdf/COM2005_024_en.pdf Dinu, M. (2006). “Escape from alternative”, Theoretical and Applied Economics, 10(505),

pp 95-100 Dragomirescu, H. (2003). Competences – a strategic endeavour for competitiveness in the

new economy. In: Angelescu, C. (editor), “Economic eeducation. Present and perspectives”, Economica Publishing House, Bucharest, pp 199-205

Dragomirescu, H. Filip, F.G. (2008). “The Knowledge Society: Operationalizing the Concept at the Public Perception Level in Romania”, Revue Roumaine de Sciences Economiques, forthcoming

Emerson, M., Aydin, S., De Clerck-Sachsse, J., Noutcheva, G. (2006). “Just what is this ‘absorption capacity’ of the European Union?” Policy Brief, no.113, Centre for European Policy Studies, Brussels

Filip, F.G., Dragomirescu, H. (2006). “The problem with the Knowledge Society in Romania. Reflections in an European context”. In: Roşca, I.Gh. (editor), The Knowledge Society, Economica Publishing House, Bucharest, pp 17-30

Liedtka, J.M. (1998). “Linking strategic thinking with strategic planning”, Strategy & Leadership, 26(4), pp 30-

Long, D. (1997). “The Why and How of EU enlargement”, Working Paper no.16, Institute of International Relations, University of British Columbia, Vancouver

Miles, I. (2003). “Rethinking Organisation in the Information Society”. In: Beckmann, G., Krings, B.J., and Rader, M. (eds.), Across the Divide: Work, Organisation and Social Exclusion in the European Information Society, Berlin, Edition Sigma, pp 65-89

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Pollack, M.A. (2005). “Theorizing the European Union: International Organization, Domestic Polity, or Experiment in New Governance?” Annual Review of Political Science, vol.8, pp 357–398

Rehn, O. (2006). “EU enlargement and the Western Balkans”, speech 06/85, Law School of Ljubljana University, Ljubljana, 10 February 2006

http://www.libertysecurity.org/article825.html Schimmelfennig, F., Sedelmeier, U. (2004). “Governance by conditionality: EU rule transfer

to the candidate countries of Central and Eastern Europe”, Journal of European Public Policy, 11(4), pp 669–687

Sparrow, P.R., Hodgkinson, G.P. (2006). “What is strategic competence, and does it matter? Exposition of the concept and a research agenda”, Working Paper 06–16, Cornell University, Center for Advanced Human Resource Studies, Ithaca, NY

http://www.ilr.cornell.edu/depts/cahrs/downloads/PDFs/WorkingPapers/WP06-16.pdf Steunenberg, B., Dimitrova, A. (2007). “Compliance in the EU enlargement process: The

limits of conditionality”, European Integration Online Papers, 11(6) http://eiop.or.at/eiop/index.php/eiop/article/view/2007_005a/53 Verheugen, G. (2000). “Enlargement of the European Union: What now?” Global View

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ROMANIA’S ECONOMIC GROWTH DURING 1990-2006 AND IN THE FIRST

SEMESTER OF 2007

Vergil VOINEAGU

Ph. D. Professor Daniela ŞTEFĂNESCU

Ph. D. Senior Lecturer Academy of Economic Studies, Bucharest

1. General remarks on the economic growth evolution In the hierarchy drawn up by the World Economic Forum 2006 – 2007 based on the

global competitiveness (Global Competitiveness Index(1)), Romania was placed, in 2006, on the 68th position among 117 countries, respectively on the 67th position in 2005, within the development section, characterised by “...more effective production processes and upper quality products, having as main competitiveness sources the tertiary education and the vocational training (category 5), effective markets (category 6), as well as the capability of exploiting the existing technology (category 7)...”.

It is unanimously recognised that, during the last years, Romania has steadily recorded an economic growth, enabling the macro-economic stableness, core prerequisite for the sustainable economic development, as key objective of the integration into the European Union structures, on the one side, and, on the other side, due to the stringent need to solve the problem of catching up the Member States, in terms of economic development level.

Till the moment of reaching the above-mentioned results, one should not skip over the fact that, during the initial reforms (1990 – 1992), the Gross Domestic Product of Romania (whose growth is conventionally identified with the economic growth syntagm) recorded significant decreases, due to the strong decline of production, investments and exports, at the same time with the fast increase in imports; for instance, as compared to 1989, the Gross Domestic Product decreased by 5.6% in 1990, by 12.9% in 1991 and by 8.8% in 1992. The sharpening of macro-economic and sectorial structural disequilibria, associated to the fast raise of inflation rate, budgetary deficit and balance of payments, as well as to the exchange rate fluctuation, represented the main factors affecting the economy, the social life and the environment quality.

During the second stage of transition to the market economy (1993-1996), a growth of the Gross Domestic Product was recorded. During the whole period, the yearly variation of Gross Domestic Product ranged between 1.5% in 1993 as against 1992 and 7.1% in 1995 as compared to 1994. All branches had a positive contribution to the achievement of these results, excepting 1996 when, for a few fields, declines of Gross Domestic Product were recorded (-4.2% in agriculture in 1996 as against 1995; –7.1% in public administration; –

(1) The competitiveness Index 2006 – 2007 compiled by World Economic Forum (Global Competitiveness Index) points out the key factors for productivity and competitiveness stimulation, grouped in 9 categories: 1) institutions; 2) infrastructure; 3) macro-economic climate; 4) health and basic education; 5) tertiary education and training; 6) market effectiveness; 7) technological level; 8) business environment level; 9) innovation.


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12.2% electricity and thermal energy; -9.8% mining and quarrying; –14.2% financial-banking services).

In 1996, as consequence of launching a new set of structural reforms, the positive trend of the economic growth begun in 1993 was interrupted, this phenomenon being reflected by the decline of the Gross Domestic Product by 6.1% in 1997 as compared to 1996; by 4.8% in 1998; by 1.2% in 1999. The first positive effects of these reforms occurred even since the end of 2000, when the Gross Domestic Product resumed its increase (by 2.1% as a whole, as against previous year), though the agricultural production of this year was severely affected by drought (-18.1% as against 1999). Between 2001 and 2006, the evolution of Gross Domestic Product marked a sharpening in the upward trend of economic growth, corresponding to an average yearly rhythm of about 6% for the whole period. The year 2006 has a special meaning, at least from the following standpoints: it marked the end of the preparatory stage for Romania’s accession to the European Union and the beginning of the harmonisation of national socio-economic structures with the ones of developed countries, particularly with the EU Member States; the economic growth was further sustained by services. The investments sector, and particularly the construction sector, but also industry which though recording fluctuations has steadily contributed in a positive manner to the GDP growth. The inflation was below the target established by the National Bank of Romania; the trust in the national currency continued to raise.

The growth by 7.7% of the Gross Domestic Product in 2006 is to be embedded in the general process of economic growth that started in 2000 and, through the last recorded results, Romania was by 4.8 percentage points above the average for EU – 25 (2.9%).

Percentage 1989=100.

1989=100

88.1

82.8 84.1

93.1

105.1

113.2

100.9

88.4

79.677.978.8

84.8

79.176.175.0

82.2

94.4

70.0

80.0

90.0

100.0

110.0

120.0

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

Figure 1. Evolution of Gross Domestic Product during 1990-2006 The results corresponding to 2006 were close to the ones recorded by Lithuania (7.5%), but

were much above the rhythm recorded by Sweden (4.4%), Hungary and Spain (each of them with a 3.9% growth of GDP), Belgium (3.1%), etc. Despite these results, as compared to the other European countries, Romania records a level of GDP per inhabitant (at the purchasing power parity) of about 30% of those recorded by the Member States of EU-25.

It is worth mentioning, however, that the process of economic growth was mainly sustained by consumption and investments. During 2001-2006, the yearly average rhythm of economic growth was about 6% and was entailed by construction (8.2 %), industry (5.4 %) and services (5.8 %).


17

17

2. GDP growth in 2006 The Gross Domestic Product for 2006 amounted to about 342.4 billion lei, 97153.6

million euros(2), 8800 euros reverting per inhabitant in PPS(3). Within the growth by 7.7% of the Gross Domestic Product recorded in 2006 as compared to 2005, the dominant contribution came from services, with about 50% of total growth; industry, which contributed with 1.7 percentage points and construction with 0.9 percentage points.

GDP per inhabitant, compiled based on purchasing power standards,

during 1990-2006 Table 1

MU 1990 1995 2000 2001 2002 2003 2004 2005 2006 Romania USD 3643 6595 5750 5500 6100 6300 7300 8100 8800 Average of euro area***) USD 18390 20153 23600

25400

25800

26300

27600

28700 29330 e

Ratio between Romania – euro area % 19.8 32.7 24.4 21.7 23.6 24.0 26.4 28.2 30.0

e Estimates. Compiled based on Purchasing Power Standards (EU-25=100).

Figure 2. GDP per inhabitant, compiled based on the standard purchasing power parity, during 1990-2006

From the standpoint of GDP formation, it is worth mentioning that the structural

changes in national economy were associated to a diminution of industry and agriculture contribution to the formation of Gross Domestic Product, at the same time with an increase in the contributions of construction, transports, communications and services.

(2) According to the average exchange rate established by the National Bank of Romania. (3) The Standard Purchasing Power Parity is the conventional currency that excludes the differences between national prices and is used inside the EU in view to express the GDP per inhabitant.

6595

5750 5500 6100

63007300

88008100

3643

19.8

32.7

24.4

21.7

23.6 24.0

26.428.2

30.0

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

10000

1990 1995 2000 2001 2002 2003 2004 2005 20060.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

Romania Ratio between Romania – euro area

USD iPPS


18

18

Structure of Gross Domestic Product, by activity, during 1990-2006 Table 2

(%) 1990 1995 2000 2001 2002 2003 2004 2005 2006

Gross Domestic Product 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 of which: Gross Value Added: 91.9 92.3 88.5 89.3 89.5 88.8 89.2 88.3 88.6 - agriculture 21.8 19.8 11.1 13.3 11.4 11.6 12.6 8.5 8.1 - industry 40.5 32.9 27.3 27.7 28.1 25.0 24.7 24.1 23.9 - construction 5.4 6.6 4.9 5.3 5.8 5.8 5.9 6.3 7.0 - services 26.5 36.0 46.3 44.5 45.3 46.4 46.0 49.4 49.6

In this context, the weight of industrial production in the Gross Domestic Product

decreased from 40.5% in 1990 to 23.9% in 2006, while the one of agriculture fell from 21.8% to 8.1%, in parallel with the increases recorded for services (from 26.5% in 1990 to 49.6% in 2005) and construction (from 5.4% in 1990 to 7.0% in 2005), thus confirming the structural changes stated in 1990.

Figure 3. Evolution of GDP main components’ structure, by activity, during 1990-2006

Another positive phenomenon in the recent period, that confirms the national

economy compliance with the sustainable development coordinates, is the relative stabilisation of the industry and agriculture weights in total Gross Domestic Product; thus, in case of industry, its weight in GDP fell from 27.3-27.7% during 2000-2001 to 24.1% of total in 2005, to 23.9% in 2006 respectively, while in case of agriculture the recorded trend is the one of stabilisation around 8 – 8.5% of GDP.

3. Sectorial trends From the point of view of achievements by main components of Gross Domestic

Product, respectively from the side of Gross Value Added, the transition to the market economy materialised in sinuous evolutions – mostly decreases, which started their recovery only at the time of economic growth acceleration, respectively since 2000.

8.18.512.611.611.413.311.119.821.8

23.924.124.725.028.127.727.332.9

40.5

7.06.35.9

5.85.85.34.9

6.65.4 49.649.446.046.445.344.546.3

36.026.5

0.0

20.0

40.0

60.0

80.0

100.0

1990 1995 2000 2001 2002 2003 2004 2005 2006

Gross Value Added in agriculture Gross Value Added in IndustryGross Value Added in construction Gross Value Added in Services


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19

Indices of Gross Domestic Product and of Gross Value Added, during 1990-2006. Changes as compared to previous year. Percentage

Table 3 1990 1995 2000 2001 2002 2003 2004 2005 2006 Gross Domestic Product -5.6 7.1 2.1 5.7 5.1 5.2 8.5 4.1 7.7 of which: - Industry -16.7 5.6 5.9 4.4 5.1 4.4 6.4 2.3 6.9 - Agriculture*) 37.3 4.6 -18.1 28.0 -6.7 5.2 18.6 -18.7 3.3 - Construction 1.1 6.7 6.3 11.1 7.6 7.0 9.1 9.8 19.4 - Services 2.1 8.2 5.5 3.6 7.1 5.5 6.8 9.4 7.3

*) Including sylviculture, fishery and pisciculture. Due to the increase of the amount of activity, as well as of the decrease of the

material consumptions, against the background of the reorganization and modernization of the economy and of the economic recovery, the gross added value on sectors registered some significant variations. It increased from 26.5% in 1990 to 49.6% in 2006 in the services sector and from 5.4% to 7.0% in the construction sector.

Percentage

Figure 4. Gross Domestic Product and the Gross Added Value Indices during 1990-2006.

Changes as compared to the previous year Lately, the first half of 2007 included, the industry and the services sectors showed a

positive trend, generated by competence and performance, as consequence of the fast implemen-tation of the modern computer technology, the appearance of some new types of services included.

Compared to 2005, in 2006, the retail increased by 24% and the market services carried out mainly by the population by 13.6%. The increase of the retail was determined by the evolution of the commerce with food products, 27.7%, and by the commerce with non-food products, too, that also exceeded 20%. It is worth mentioning the evolution of the virtual shops commerce, by almost 57%, which leads to the placing of this type of commerce in the European trend in the near future.

At the same time, we notice a continuous increase of the constructions weight as against the GDP, on the terms of the allotment of some important funds for the infrastructure development.

The sectorial analysis of the formation and the dynamics of the gross domestic product from a different perspective highlight the decisive part of the private sector.

4.17.7

37.3

4.6

-18.1

28.0

-6.7

5.2

18.6

-18.7

3.3 8.5

5.25.1

5.7

2.1

7.1

-5.6 -20.0

0.0

20.0

40.0

1990 1995 2000 2001 2002 2003 2004 2005 2006

Gross Domesttic Product GVA in industry GVA in agriculture

GVA in construction GVA in services


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20

4. Share of the private sector in the formation of the Gross Domestic Product The start of the economic reform process led to a radical change in the property

structures. The structural changes in the economy can be also found in the evolution of the contribution of the private sector to the formation of the Gross Domestic Product and to the Gross Added Value, respectively.

We should mention the fact that, during the 17 years of transition, even the concept of “the formation” of the private sector registered different evolutions. Thus, in the first years, the land reform was accompanied by the privatization, in general, of small and medium, precisely for ensuring the premises for the increase and the development of the private sector based on the principle “top down”.

Weight of private sector in the Gross Domestic Product and the Value Added during 1990-2006

Table 4 (%)

1990 1995 2000 2001 2002 2003 2004 2005 2006 The PIB Weight 16.4 45.3 65.6 68.0 69.4 67.7 71.5 69.9 69.8 Out of which:

- Industry 3.7 29.9 68.4 76.0 80.6 84.2 80.4 82.4 82.7 - Agriculture*) 69.8 89.0 98.6 97.8 98.3 98.0 97.7 97.1 99.6 - Construction 3.7 57.8 91.7 94.7 102.7*) 110.3*) 118.6*) 99.8 100.0

- Services 2.6 58.1 71.6 68.4 67.6 62.3 70.1 71.8 70.5 *) Sylviculture. hunting. fishery and pisciculture included. **) In 2002. the enterprises of the public sector had a negative gross value added as a consequence of the registered losses.

In the last 6 years, in the conditions of the private property predominance, the

previous concept changed, the privatization becoming a dynamic factor for the economic growth which should ensure the recapitalization and modernization. The promotion of a performing management of large enterprises is also part of the above-mentioned change.

Percentage

Figure 5. Weight of private sector in the Gross Domestic Product and the Value Added during 1990-2006

16.4

69.8 69.971.567.769.468.0

65.6

45.3

0.0

25.0

50.0

75.0

100.0

1990 1995 2000 2001 2002 2003 2004 2005 2006 Weight of private GVA in industry Weight of private GVA in agricultureWeight of private GVA in construction Weight of private GVA in servicesWeight of private sector GDP in total


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21

At the same time, the institutional and legislative frame was updated according to the new requirements of the social and economic development. The privatization process was transferred to a governmental authority (The Authority for the Privatization and Administration of the State Shares – APASS) which aims not only at the privatization but also at the industrial reconstruction, the management of the state shares as well as at the following of the post-privatization actions assumed by the new owners. In short, in 2006, the weight of the private sector as against the Gross Domestic Product was almost 70% compared to 16.4% in 1990. Since 2006, the formation of the GDP in the private sector on the main branches was achieved almost 100% in constructions and agriculture, followed by the industry and services with a share of 82.7% and 70.5% of GDP, respectively.

Another significant result of the increase of the private sector share in economy is the record level of the investments. The positive signs given by the banks as to the credit granted for the private sector support the previous statement. In 2006, the level of the credit granted by banks amounted to 56%, although the amount of the credits drawn by it is still relatively low (27% of GDP).

5. Uses of Gross Domestic Product The domestic allotments of the Gross Domestic Product represent the final

consumption of the population households, of the central and private administration, as well as the gross capital formation. All these elements of the domestic demand have been influenced, in different proportions, by the general economic growth and by the size of the GDP, respectively.

Allotments of the Gross Domestic Product, 1990-2006.

Percentage changes as compared to previous year Table 5

(%) 1990 1995 2000 2001 2002 2003 2004 2005 2006 Final consumption out of which: 8.9 10.8 1.5 6.3 4.9 8.3 10.2 9.5 11.5 Final consumption of population households 8.0 13.0 -0.8 6.9 5.3 8.5 14.5 9.7 14.1 Final collective consumption of central administration +14.1 +1.0 11.9 2.8 3.2 7.7 -4.9 9.0 2.5 Gross capital formation -1.1 -4.2 19.8 17.8 0.4 8.7 19.4 2.5 17.6 out of which: - gross fixed capital formation -35.5 6.9 5.5 10.1 8.2 8.6 11.1 12.6 16.1

Starting with 2003, final consumption has constantly been on the rise, a phenomenon

caused by the decrease in the inflationary pressure and the increase in the consumption needs of the population, another influencing factor being the considerable reduction of self-consumption in the framework of the volatile results obtained in agriculture due to unfavourable weather conditions (with the exception of 2004).

The purchases of goods and services through the trade network were stimulated by salary rises, especially starting with 2005 as result of the introduction of the unique tax quota, the increase in the minimum gross salary per economy, the salary rises granted in the public sector, but also due to the increased availability of banking funding sources.


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22

In 2006, compared to 1990, the structure of domestic demand, broken down by components, experienced the following trends: (i) the share of final consumption in GDP rose by 8.7 percentage points reaching 87.9% of GDP; the share of the final consumption of population households increased by 3.7 percentage points, and the share of the collective final consumption of administration fell by 4.7 percentage points; (ii) structural reforms had an effect on gross capital formation, namely gross fixed capital formation in total supply (GDP); thus, due to the reduction in the weight of economy stocks, the share of gross fixed capital formation in GDP increased from 19.8% in 1990 to 24.6% in 2006.

At the level of national economy, the volume of investments varied considerably: between 1990 and 1992 it decreased, reaching less than half the level recorded in 1989, between 1993 and 1996 investments rose by 3.1-26.4% per year, then, at the end of 2000, compared to 1996, the level of investments fell by 11.7% and starting with 2000 it continued to rise by 3.5-9.7% per year.

Evolution of investments, during 1990-2006. 1990=100

Table 6 (%)

1991 1995 2000 2001 2002 2003 2004 2005

Total (1990=100) 74.2 111.4 101.5 109.6 120.2 133.7 147.1 163.0

Figure 6. Structure of investments by main activities of the national economy, in 2005

Due to the positive evolutions recorded in the last two years, the volume of

investments nearly doubled in 2006, compared to 2000, after a sharp decline between 1991 and 1994. It’s important to mention that this was mostly the result of the rise in the investments made in the private sector, which proves that the resources of this sector increased, in the context of economic growth, of the re-launching of credit granting and credit granting tools, as well as of the improvement of business environment, by consolidating macro-economic stability and simplifying bureaucratic procedures.

In 2006, compared to 2005, the average increase rate of total investments was 16.1%, of which: 18.7% for new construction works; 12.4% for equipment, including transport means; 55.8% for other expenses. By activities of the national economy, the highest investments were made in industry (40.0% of the total), trade and services (24.0%) and constructions (15.0%).

An important factor for the intensification of the investment process but also for the increase in the volume of foreign direct investment (FDI) in the context of the development and modernisation of national economy is the fact that the imports of equipment experienced a considerable rise, while the current account deficit of the balance of payments was maintained within financing limits, a rise particularly due to the simultaneous and constant increase in the volume of exports of goods and services.

Construction, 5.6 Agriculture, 5.5

Industry, 46.3 Services, 42.6


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23

Foreign direct investment, during 1991-2006 Table 7

Million euros*) 1991 1995 2000 2001 2002 2003 2004 2005 2006 Foreign Direct Investment 618 884 1147 1294 1212 1946 5183 5213 9082 FDI stock 618 3430 6966 8656 8516 10072 15040 21885 30967

*) ECU until December 31, 1998. In one of the most recent studies conducted, “South East Europe Attractiveness

Survey”, the consultancy company Ernst & Young views Romania as the most attractive destination for investments in the South Eastern Europe, considering that foreign investors have substantially improved their perception of this part of the old continent. The above-mentioned study points out the fact that all the conditions are met for our country to increase its potential as an investment destination in the next three years.

The improvement of the business environment, the effects of the introduction of the unique tax quota and the positive attitude of foreign partners towards Romania have led to a volume of foreign direct investment amounting to 9.1 billion euros in 2006. The record value of 2006 – more than 9 billion euros – on the rise by 74.2% compared to the same period of the previous year (5213 million euros) includes the amount of 2.2 billion euros, standing for the takeover by Erste Bank of 36.8% of the shares of the Romanian Commercial Bank.

The most important component of direct foreign investments attracted by Romania was “capital participation” (€ 4,098 million representing 45.1% of total foreign direct investments - FDI), followed by “other capitals”, namely loans granted by mother company to the structures affiliated in Romania (€ 3,029 million representing 33.3% of total FDI), and “reinvested profit” component (€ 1,956 million representing 21.5% of total FDI). Therefore, 2006 represents absolute record regarding direct foreign investments attracted by Romania.

The evolution registered by direct foreign investments in Romania in 2006 also confirms the forecast of international organizations, pointing out that, following the accession to the European Union, Romania is a more and more attractive destination for foreign investors, because the adoption of the Acquis Communautaire and the lower price of highly qualified labour force are solid arguments.

Evolution of external demand – expressed by net export indicator (difference between export and import of goods and services) – positively influenced the gross domestic product (GDP) only in 1997 and 1999, when contributed to the diminution of its contraction, partly compensating, more fragile in 1997 and more substantial in 1999, the consistent fall of internal demand.

Contribution of net export to real growth of Gross Domestic

Product, during 1990-2006 Table 8

(%) 1990 1995 2000 2001 2002 2003 2004 2005 2006 Gross Domestic Product -5.6 7.1 2.1 5.7 5.1 5.2 8.5 4.1 7.7 Of which: a) internal demand 6.0 7.3 4.5 8.9 4.2 8.8 13.0 8.7 14.1 b) net export -11.6 -0.2 -2.4 -3.1 0.9 -3.6 -4.5 -4.6 -6.4 Of which: - export (+) -8.2 4.2 6.5 4.0 5.8 3.0 4.8 2.9 3.5 - import (- ) 3.4 4.4 8.9 7.1 4.9 6.6 9.3 7.5 9.9


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24

As result of a higher rate registered by imports, in comparison with exports, external demand negatively influenced the real growth of GDP. The evolutions registered by net export tempered the general economic growth, determining a negative influence (-6.4% percentage points) over GDP growth.

In 2006, commercial deficit FOB/CIF, was € 14.9 billion (FOB/CIF prices) increasing by 44.5% as against the previous year. It should be mentioned that almost 50% of commercial deficit came from energy balance disequilibrium (21.2% of total deficit was generated by crude oil, 19.6% of mineral fuel and 9.2% of natural gas), because Romania is net exporter of oil products and electric energy (€ 1,859 million and respectively 132.7 € million) and is net importer for natural gas, crude oil and other mineral fuel (€ 7,447.3 million). Another particularity of Romanian foreign trade is that over 60% are developed with EU member states.

6. Price evolution The disinflation process accompanied economic growth in 2006, yearly rate of

inflation falling in December to 4.9% (by 3.7 percentage points under 2005 level). The elements supporting these evolutions provided prudent monetary policy, materialized by nominal appreciation of national currency as against € (by 8.0%, December/December) and by administrative and prudential measures adopted in order to decrease the growth of foreign currency credit. Fiscal restrictive conduit adopted mostly during the year, as well as development of a strongly competitive environment in retail sector, having also effect over the competition in the productive sector (additionally stimulated by imports pressure).

The inflation fall under 10%, starting with 2004, contributed to assure the favourable conditions to adopt, in August 2005, a new strategy of monetary policy – directly aiming at inflation. Such a strategy creates the premises of a more stable economic environment, the predictability of inflation rate having an important part in this regard. 2006 marked the disinflation consolidation, the yearly variation of consumer prices falling in September to 4.9% in comparison with the same month of 2005; through this level inflation was framed under the inflation aim set up by the National Bank of Romania. Non-food goods contributed to the yearly changes in prices (by +3.6 percentage points), followed by services (+0.9 percentage points) and food goods (+0.4 percentage points).

Figure 7. Yearly average rate of inflation, during 1990-2006

270.2

132.3 106.6109.0111.9

115.3122.5134.5

145.7

100.0

130.0

160.0

190.0

220.0

250.0

280.0

310.0

1990 1995 2000 2001 2002 2003 2004 2005 2006

Total Food goods Non-food goods Services

%


25

25

An unfavourable impact over general level of prices had and will further have the crossing of new stages of administered price adjustment (especially natural gas and electric energy) and harmonization of excise duties with the European Union levels, and significant growth of prices for food products with volatile prices – generated by supply deficit caused by draught in 2005 agricultural year.

7. Evolution of economic growth in the first semester of 2007 The Gross Domestic Product estimated for the first semester of 2007 amounted to

155,244.9 million lei current prices, increasing – in real terms – by 5.8 % as compared to the first semester of 2006.

From the standpoint of Gross Domestic Product formation, the positive contribution to the GDP growth, as a whole, is noticed for the activities belonging to services and constructions, these two branches holding altogether a weight of 58.2% in GDP. The Gross Value Added in services sector recorded an increase by 6.3%, while the volume of activities in constructions sector was by 31.6% over the level recorded in the first semester of 2006. The Gross Value Added in industry marked an increase by 5.9%, while agriculture, sylviculture and pisciculture decreased their activity volumes by 6.1%.

(%)

5.8

1.6

1.7

3.2

-0.2

-0.5

-1.0 0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0

Figure 8. Contribution of main activity branches in GDP growth in the first semester of 2007 as against the first semester of 2006

The evolution of the gross domestic product from the point of view of its use points

out an important growth of domestic demand (+12.8%) and especially of households actual individual final consumption (+11.0%) and gross fixed capital formation (+18.6%), significantly higher than GDP growth.

In the first semester of 2007, the households actual individual final consumption was positively influenced by the increase of goods volume sold by retail (+17.0%) and of the volume of market services rendered to the population (+0.4%).

The evolution of the gross fixed capital formation (+18.6%) in first semester of 2007 was determined by the increase of investments volume, the main component of this aggregate. Therefore, investments in new construction increased by 31.1%, and those in equipment (including transport means) registered a growth of 2.9% as against 2006 first semester.

Net taxes on product Services Construction

Industry Agriculture, forestry, fishery

Gross Domestic Product


26

26

The increase in the volume of imports of goods and services (+22.2%) exceeded that registered in exports of goods and services (+7.5%), which led to a higher deficit in Romania’s Trade Balance and Balance of Payments. Thus, in first semester of 2007, the Balance of Payments deficit, in real terms, was by 74.4% higher as compared to first semester of 2006.

*

The macro-economic sustainability, from Gross Domestic Product side, envisages not

only its level and dynamics – in terms of formation and usage – but also the behaviour of main factors of influence: employment and productivity; prices behaviour; financial – banking system behaviour, stableness of macro-economic equilibrium.


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27

THE COMPONENTS OF BID-ASK SPREAD FOR BSE STOCKS

Bogdan NEGREA Ph. D. Professor

Lucian ŢÂŢU Ph. D. Senior Lecturer


Abstract. An important component of the transaction costs faced by investors in financial securities is the bid-ask spread set by market maker. The goal of this study is to determine the importance of the components of spread (order processing costs, inventory costs and adverse selection costs) using o model derived by Stoll (1989). Also, we examine the relationship between some stock characteristics (such as daily volume of trading and average stock price) and spread. The data set contains information about Bucharest Stock Exchange (BSE) first tier quoted stocks, for the period 27.11.2006- 19.12.2006.

Key words: bid-ask spread; inventory cost; adverse selection cost; order cost. REL Classification: 10B, 11B

1. Introduction Financial markets allow for the demand of capital to meet the funds supply. The demand of

capital comes from firms, which have to finance their investments from government and households when their consumption exceeds their income. Therefore, it is essential for capital markets to efficiently play their role of provider of funds for investment and consumption. It would be convenient for the transactions between those who offer and those who need funds to be easily conducted, less expensive and the price to be properly established. Consequently, it is desirable that the requisite information for the transaction to be available and the cost to be relatively small. In this context, it is said that the market is operationally efficient.

A vast empirical research (Roll, 1984: pp. 1127-1139, Glosten, 1987: pp. 1293-1307, Stoll, 1989: pp. 115-134, George, Kaul, Nimalendran, 1993: pp. 109-122, Roomans, 1993, Hasbrouck, 1991: pp. 179-207, 1993: pp. 191-212, De Frutos, Manzano, 2002: pp. 959-984, Huang, Stoll, 2001: pp. 503-522, Noe, 2002: pp. 289-318) shows a continuous endeavor to estimate transaction costs. Most studies consider the case of the markets governed by prices and estimate the cost paid by the market maker, namely the mean deviation between the transaction price and the equilibrium one. A priori, the need to estimate transaction costs may seem a paradox. Wouldn’t be correct to measure the displayed spread as the mean deviation between the best offered price and the best asked price? Not all the agents bear the same costs. The displayed spread represents the effective costs paid by uninformed agents and it is observable only when a database containing the best asked and demanded prices is available. The obtained (effective) spread is the only one which is economically relevant for the market maker. It measures the mathematical expectation of the anticipated gain of the market maker by purchasing an asset and the selling it.


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28

Empirical studies have shown that the obtained spread is inferior to the displayed one and the higher the cost related to the presence of informed agents, the incentive costs (referring to account management costs) and the transaction frequency within the spread, the larger the difference between the two spreads. Unlike the displayed spread, which offers only information about maximum transaction costs, the obtained one is a relevant measure of these costs and being an unobservable variable, it must be estimated.

The estimation of transaction cost is important for numerous reasons. For instance, empirical studies enable the identification of factors that influence price volatility and the share of the volatility which is given by the public information or by the private information, respectively. Moreover, it is possible to identify the optimum method to organize the market in order to obtain a minimum volatility level. Finally, the results of empirical studies have practical implications on the strategy of placing orders, generally speaking, and more precisely, on the optimum moment during the session when agents should place their orders to keep the transaction costs to a minimum.

2. Stoll’s model According to Stoll’s model the relationship between quoted spread (S) and realized spread

is expressed based on covariance depending on two parameters: π - the probability of aprice reversal and ∂ - represents price continuation (the price continuation is given by S×∂ , and the probability of a continuation is ( )π−1 ) (Stoll, 1989: pp. 115-134). The aim is to estimate the components of quoted spread: adverse information cost, and holding cost and order cost.

The model are based on the following assumptions: - the market is informationally efficient in the sense that the expected price change in

a security is independent of current and past information; - the spread is constant within the analyzed period; - all transactions are carried out at the highest bid or the lowest ask price available in

the market. The total price change in a security may be decomposed into three components:

expected price change in the security in the absence of the bid-ask spread, price change due to the spread and price change due to new information:

etPtaVt +Δ+=Δ (1) where:

ΔV t = total price change in a security between time t-1 and time t; a = expected price change in the security in the absence of the bid-ask spread;

PtΔ = price change due to the spread; et = price change due to new information; )(eE t = 0.

In an efficient market, changes in prices due to new information are serially uncorrelated and are uncorrelated with lagged or leading values of the price change due to the spread. This implies that:

( ) ( )PPVV tttt ΔΔ=ΔΔ ++ 11 ,cov,cov (2)

The price change, taking into consideration a constant spread and based on bid price, is given by the solution of the following equation system:

( ) ( ) SBtAt ×∂−=−− 11 , with probability π (3)

( ) SBtBt ×−∂=−− 1 , with probability ( )π1− where A şi B is bid price and ask price at time t and time t-1


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29

The price change, taking into consideration a constant spread and based on ask price, is given by the solution of the following equation system:

( ) ( ) SAtBt ×∂−=−− 11 , with probability π (4)

( ) SAtAt ×−∂=−− 1 , with probability ( )π1− Stoll proves that the realized spread could be estimated as difference between

expected price change subsequent to a dealer’s buying and the expected price change subsequent to a dealer’s selling, according to the following equation:

S) - ( 2 spread realized ∂π= (5) In order to estimate the components of spread, Stoll suggests the estimation of

covariances based on tranzaction price changes and on quoted price changes:

⎥⎦⎤

⎢⎣⎡ ∂−π−π−∂=Δ +Δ≡ )21(2)21(22)1,cov(cov SPtPtT (6)

)21(22)1,cov(cov π−∂=Δ +Δ≡ SQtQtQ (7)

where: covT is covariance of tranzaction price changes; covQ is covariance of quoted price changes, Q = A (ask price) or B (bid price). 3. Data base The data set contains tranzactions prices and prices cotation for BVB stock (each wich

form the BET and the share of financial and banking firms quoted to first category of BVB) in the period 27.11.2006 - 19.12.2006. The factors for each share are present in tabel no.1.

Factors calculated for each share

Table 1 Factor Details

Daily closing inside bid prices (Bc) Daily closing inside ask prices (Ac) Daily closing prices (Dc) Intraday prices Number of daily traded shares (N) Average of intraday prices(AVGprices intraday) Simple average of intraday prices Daily RON volume of trading N x AVGprices intraday

Serial covariance of daily closing inside bid prices (covBj)

The covariance are calculated from returns of daily closing inside bid prices

Serial covariance of daily closing inside ask prices (covAj)

The covariance are calculated from returns of daily closing inside ask prices

Serial covariance of intraday transaction prices, based on the last three transaction prices in the day (covij)

The covariance are calculated from returns of intraday transaction prices, based on the last three transaction prices in the day

Serial covariance of daily closing transaction prices (covCj)

The covariance are calculated from daily closing transaction prices

Daily bid-ask spread (SDj)

( )BcAc

BcAcSDj

+×

−=

21

Average of daily bid-ask spread (Sj) Simple average of daily bid-ask spread in the period Average daily RON volume of trading in the period ($VOLj)

Simple average of the daily RON volume of trading in the period

Average stock prices of the period (Pricej) Simple average of AVGprices intraday of the period


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There are determinated the next agreagate factors for all shares (tabel no.2).

Agregate factors calculated for all shareas Table 2

Factor Details Serial covariance of daily closing inside bid prices (covB) Simple average of the covBj

Serial covariance of daily closing inside ask prices (covA) Simple average of the covAj Serial covariance of intraday transaction prices, based on the last three transaction prices in the day (covi)

Simple average of the covij

Serial covariance of daily closing transaction prices (covCj) Simple average of the covCj Average of bid-ask spread (S) Simple average of the Sj Average daily RON volum of trading of the period ($VOL) Simple average of the $VOLj Average stock prices in the period (Price) Simple average of the Pricej

4. Empirical Results 4.1. Estimation of π and ∂ For determinated composition of quoted spread have been estimated the next equations:

,uSaacov 210T +×+= (8)

,vSbbcov 210Q +×+= (9)

where, u, v are random errors, and a1 and b1 could be estimated as following: ),21()21( 22

1 ∂−π−π−∂=a (10)

)21(21 π−∂=b (11)

Equation (8) uses covariances estimated from transaction prices – either covc, calculated from daily closing prices, or covI, calculated from intraday transaction prices, based on the last three transaction prices in the day. The second one relationship uses covariances estimated from quoted prices – either covB, calculated from closing bid prices, or covA, calculated from closing ask prices. In both equations, the independent variable, S2 ist the squared value of the average proportional spread. ( 2/)/()( BidAskBidAskS +−= ). The estimated results for are presented in the table below.

Regressions of serial covariance measures against the square

of the proportional spread Table 3

Dependent variable k0 k1 R2 adjusted covI 0,1987

(2.30) -0,1294 (-3,70)

0,49

covC -0,0645 (0,55)

-0,0923 (-1,94)

0,17

covB -0,067 (-0,65)

0,030 (0,74)

0,03

covA -0,0742 (-0,63)

-0,0713 (-1,59)

0,08

The estimated value of a1 (-0,11) is given by the first two regressions in each tabel.

All values for this variable are negative and stastically significant. The estimated results


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imply the fact that the variation between companies is explained by S2 (particularly in the case of covi). These results are similarry to Roll’s theory.

The estimated value of b1 (-0,02) is given by last two regressions and has different signs. The coefficients are not statistically significant and the variation of Qcov explained by S2 it is, also, not significant.

4.2. Composition of the quoted spread The estimated parameters based on the two regressions are the following: a1= -0,110 and

b1= -0,020. The above mentioned parameters have been used in order to estimate π and ∂ : 575,0=π and .364,0=∂ Consequently, the realized spread is SS 422,0)364,0575,0(2 =− . Quoted spread is constituted from 3 components: adverse information cost, holding

cost and order cost. It is considered that realized spread represents the expected earning for a transaction and consists in holding cost and order cost and the earning is null when quoted spread is determinated by adverse information cost. This fact reveals that the adverse information cost could be estimated as difference between quoted cost and realized spread:

SSSSSSS 578,0442,0)364,0575,0(2)(2 =−=−−⇔∂−π− . The realized spread is constituted at least from holding cost, and order cost. Stoll showes

that realized spread could be estimated even in the absence of order cost and the value is: S)5,0(2 −π . Consequently, holding cost is: SS 15,0)5,0575,0(2 =− . Order cost is estimated as

difference and the value obtained is SSS 272,015,0422,0 =− . The results are presented in the table below:

The components of quoted spread Table 4

Component Value Adverse information costs 0,578S Holding Costs 0,15S Order Costs 0,272S TOTAL S

4.3. The impact of the stock characteristics The last section of the paper is devoted to the analysis of particular features of traded

financial assets ($VOL and Price) which could explain the differences of spread between companies according to the following regressions:

XSSacov 22

210T ××α+×α+= (12)

,XSSbcov 22

210Q ××β+×β+= (13)

when Xa 211 ×α+α= (14) ,Xb 211 ×β+β= (15)

and X is, in order, $VOL and Price. Reffering to the regressions estimated using covariance between bid price and ask

price, the results are not statistically significant, and the value of R2 reveals that the two variables does not explain the variation of spread.


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The regressions where the dependent variable is in order Icov and Ccov are presented in the table below due to their importance in estimating parameters π and ∂ . It could be noticed that the results are not statistically significant.

The results of estimated regressions Table 5

Dependent variable X a0 1α 2α R2 adjusted

covI Price 0,169 (1,77)

-0,128 (-3,59)

0,006 (0,77)

0,47

$VOL 0,144 (0,89)

-0,122 (-3,07)

0,0003 (0,38)

0,45

covC Price -0,097 (-0,74)

-0,090 (-1,86)

0,006 (0,64)

0,13

$VOL -0,280 (-1,30)

-0,066 (-1,28)

0,001 (1,19)

0,2

5. Concluding remarks This study reveals that the adverse information cost represents the most important

component (57,8%) of quoted spread, and the results obtained are in accordance with Stoll’s study. Moreover, according to Stoll’s estimations order cost represents 47% (the largest from the three components) of quoted spread, compared to our results which reveals a ration of 27,2% (a the second larges component). This aspect could be explained by the difference of administrative organization of financial markets. Also, $VOL and Price have no influence on quoted spread.

Bibliography

De Frutos A., C. Manzano, „Risk Aversion, Transparency and Market Performance”, Journal of Finance, no. 57(2), 2002

George T., Kaul G, M. Nimalendran, „Estimation of the bid-ask spread and its components: a new approach”, Review of Financial Studies, no. 4, 1993

Glosten L., „Components of the bid-ask spread and the statistical properties of transaction prices”, Journal of Finance, no. 42, 1987

Hasbrouck J., „Measuring the information content of stock trades”, Journal of Finance, no. 46, 1991

Hasbrouck J., „Assessing the quality of a security market: a new approach to transaction-cost measurement”, Review of Financial Studies, no. 6, 1993

Huang R., H. Stoll, „Tick Size, Bid – Ask Spreads and Market Structure”, Journal of Financial and Quantitative Analysis, no. 36(4), 2001

Noe Th., „Investor Activism and Financial Market Structure”, Review of Financial Studies, no. 15(1), 2002.

Roll R., „A simple implicit measure of the bid-ask spread in an efficient market”, Journal of Finance, no. 39, 1984

Roomans, „Asymmetric information in securities markets: an empirical investigation of serial covariance models of spread”, working paper, University of Pennsylvania, 1993

Stoll, H., „Inferring the components of the bid-ask spread: theory and empirical tests”, Journal of Finance, no. 44, 1989


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AN ANALYSIS OF THE CONVERGENCE PROCESS IN THE EAST AND CENTRAL-EUROPEAN

COUNTRIES

Daniela Livia TRAŞCĂ

Ph.D. Candidate Assistant Academy of Economic Studies, Bucharest

Abstract. Each member state of the European Union (EU) have to write down an economic development strategy hereby attend to obtain the most opportunities which follow from this statute. As regards the economic field, the main directions must be: the convergence process, the competitiveness and the policies regarding the demography, the employment and labour market.

In this paper I analyse the process of economic convergence of Central and East European countries (CEECs), before joining EU. Comparative analyses of the EU member states with the previous entrants into EU (Ireland, Greece, Spain and Portugal) reveald that the formers have been more successful in their convergence process before joining EU.

Key words: convergence; economic integration; foreign direct investment; economic gap. REL Classification: 20F, 20B; 20E; 20Z.

The analysis of the convergence process embrace two main components: - real convergence (catching-up process) with the rest of the EU, process which

decribes the convergence of income levels; - nominal convergence, process which reflects the convergence of price levels. As concern the nominal convergence criterions, the fulfilment of those was mentioned in

the Maastricht Treaty and regards: public debt, bugetary deficit, interest rate, inflation rate and rate of exchange. The fulfilment of the real convergenge criterions is not mentioned in any international treaty. The achievement of these is very important because real convergence create the premises for a country to benefit the most after the adoption of the euro.

This study concerns the countries which became members of the European Union in May 2004 ( Slovenia, Poland, Hungary, Estonia, Czech, Slovakia, Lithuania, Latvia) and, also, the countries which became members of the EU this year, Romania and Bulgaria. The real con-vergence criterions analysed are: the share of GDP at PPP from EU average and average annual growth, for establish the years needed to each country to achieve 100% EU average, the share of export of goods and services in the GDP, gross fixed capital formation from GDP and the fo-reign direct investment inward stock in the GDP. The period analysed is from 1997 until 2008.

The recent empirical analyses show that catching-up with the rich countries or beta convergence is very rare, more frequent is sigma convergence or convergence inside the clusters or groups of countries.


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The East and Central European countries (CEECs) are interested primarily in beta convergence, that is to say in catching-up with the richer countries of the EU. Beta convergence requires high saving and investment ratio, constant upgrading of educational standards and of the work force, improvement of competitiveness. In order to illustrate the speed of convergence of CEECs the analysed period is divided in two subperiods as we can see from the table below:

The convergence of the CEECs with EU-27 Table 1

Share of GDP at PPP from EU average in % (EU-27=100)

Speed of convergence (reducing the GDP gap with EU-27 in %)* Country

1997 2000 2004 2008 1997-2004 2004-2008 Bulgaria 26.6(e) 27.9 33.6 40.2(p) 7.0 6.6 Czech Republic 73.3(e) 68.7 76.1 83.7(p) 2.8 7.6 Estonia 41.2(e) 44.8 57 74.5(p) 15.8 17.5 Lithuania 38.3(e) 39.4 51.1 64.6(p) 12.8 13.5 Latvia 34.7(e) 36.9 45.5 63.7 10.8 18.2 Poland 47.0(e) 48.5 50.8 56.9(p) 3.8 6.1 Romania : 26 33.6 40.5(p) 7.61 6.9 Slovenia 76.0(e) 78.9 85 93.2(p) 9.0 8.2 Slovakia 52.0(e) 50.5 56.7 69.5(p) 4.7 12.8 Hungary 51.7(e) 56.3 63.9 65.5(p) 12.2 1.6

*own calculations based on Eurostat.1analised period is from 2000.(e)estimations; (p)previsions. As we can see from this table, the integration has a positiv impact of the real

convergence process. This period was the most rapid process of reducing the gap between the income levels of the EU-27 and the Baltic countries :Estonia, Lithuania and Latvia. The next group of countries involved Hungary and Slovenia, countries who managed to reduce the gap with EU-27 average by 12.2 per cent and 9.0 per cent, respectively.

If we compare the initial conditions of the CEECs with the initial conditions of the cohesion countries we can identify some similarities as we can see from the next figure:

- at the time of joining the EU of Spain, in 1985, the income level relative to the EU-12 average was 73 per cent; this level was practically the same as that of Slovenia in 2004, as relative to the EU-15;

- at the time of joining the EU, Ireland and Greece were comparable to the Czech and Hungary;

- Portugal, at the time of joining the EU was slightly above the income levels of Slovakia, Baltic countries and Poland.

Source: Eurostat şi WIIW; U. Varblane, P. Vahter, 2005 p.20

Figure 1. The real convergence process among CEECs in 1995-2005 and EU cohesion countries after joining the EU


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In the figure 1, the upper part of each stake denotes by how many percentage points the CEECs converged with the average EU-15 level in 1995-2005 and by how much did the cohesion countries do likewise in a period of the same duration. The lower part of each stake indicates the initial GDP levels of CEECs vis-à-vis EU-15 level in 1995 and the same for the cohesion countries vis-à-vis EU-12 level at their moment of entry.

For a better understanding of the results it is necessary to analyse some macroeconomics variables before CEECs joining EU such as: the speed of convergence, the share of export of goods and services in the GDP, the gross fixed capital formation from GDP and the foreign direct investment inward stock in the GDP.

Macroeconomic situation of CEECs and cohesion countries before joining the EU

Table 2

Country Speed of convergence (reducing the GDP gap

with EU-27 in 1997-2004 (%)

The share of export of goods and services in

the GDP (%)

The gross fixed capital

formation from GDP (%)

The foreign direct investment

inward stock in the GDP (%)

Bulgaria 7.0 40 20.5 241 Czech Republic 2.8 62 25.8 47.7 Estonia 15.8 53 31.4 81.6 Lithuania 12.8 41 22.3 25.9 Latvia 10.8 30 27.5 30.4 Polonia 3.8 32 18.1 30.7 Romania 7.6 30 21.8 211 Slovakia 9.0 49 24.1 34.2 Slovenia 4.7 65 25.4 21.3 Hungary 12.2 55 22.4 55.7 Ireland -21 361 16.51 1551

Spain -61 191 21.11 51

Portugal -41 321 22.31 191

Greece 01 191 18.71 201

Source: 1U.Varblane, P. Vahter, calculations based on Eurostat and World Investment Report 2003.; own calculations based on Eurostat.

In table 2 are analysed some macroeconomic indicators necessary to compare the initial

conditions of the CEECs with the initial conditions of the cohesion countries. In the second column are values referring to the speed of convergence of CEECs in 1997-2004, and regarding cohesion countries, the values are referring of the period before these countries joining EU (Ireland: 1961-1973, Spain, Portugal: 1973-1985, Greece:1973-1985). The results of table 2 reveal that CEECs have been much more successful and their convergence process was very dynamic, the convergence of income ranging between 2.8 per cent from EU-27 average and 15.8 per cent.

As regard the openness, this indicator vary between 19 and 36 per cent for the cohesion countries at the time of there joining in EU. By comparison, the openness ratio of CEECs in 2004 lies between 30 per cent in Latvia and 65 per cent in Slovenia. If we are referring at the gross fixed capital formation as share from GDP, we can see that are not important differences. Important differences are very easy to notice as concerns the propensity of the countries analysed to attract FDI. Beside Ireland, all cohesion countries were much lower attractive for FDI at the time of joining EU by comparison with CEECs.

For establish the years needed for each country to converge 100% EU-27 income level average I will use the next equation:

c0×(gc)n=cT×(gEU)n , where: - c0 is the initial level of GDP per capita relative to the EU-27 or EU-15 level; - cT is the targeted level for CEECs (in this case 100%); - gc, gEU are the expected average annual growth indices for CEECs and EU-15 and EU-27; - n is the number of years needed to reach the target level.


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From the equation below arise next equation: n=[ln(cT)-ln(c0)]/[ln(gc)-ln(gUE)] For my calculations I assumed that the EU-15 grow at an average per capita long-

term rate of 2% and for EU-27 an average per capita long-term rate of 2.2%. The results can be seen in the table below:

Speed of convergence to reach full EU-15 income level and EU-27 income level Table 3

Country

Share of GDP per capita in EU-27 average at PPP (EU-27=100) in

1997

Share of GDP per capita in EU-

15 average at PPP (EU-15=100)

in 1998

Average annual growth

Years required to target 100%

EU-27 average

Years required to target 100%

EU-15 average

Bulgaria 26.6(e) 23 4.6 58 59 Czech Republic 73.3(e) 61 2.7 62 71 Estonia 41.2(e) 36 8.7 14 16 Lithuania 38.3(e) 34 7.65 18 20 Latvia 34.7(e) 30 8.5 18 19 Poland 47.0(e) 41 4.16 40 42 Romania 261 221 6.51 33 35 Slovenia 76.0(e) 66 3.93 16 22 Slovakia 52.0(e) 45 4.18 34 38 Hungary 51.7(e) 45 4.34 31 35

1 for Romania, the level of income is from 2000, and the average annual growth is for period 2000-2006 Source: Eurostat, own calculations.

In the table 3, the average annual growth was calculated for each country, beside

Romania, for the period 1997-2004, using Eurostat. From the table we can see that Romania for the period 2000-2006 had an average annual growth to 6.5%, so it needs 33 years to reach the full EU-27 income level and 35 years to reach the full EU-15 income level. Also we can see that Czech and Bulgaria need 62, respectively 58 years to reach full EU-27 years.

From this analyse we can say that the CEECs were much prepare for joining EU than cohesion countries, from vary points of view like the share of export of goods and services in the GDP, the gross fixed capital formation from GDP and the foreign direct investment inward stock in the GDP. We can see also that CEECs need between 16 years and 71 years to reach full EU-27 income level. For these countries to continue to be almost as performing as there were in the period analysed after joining EU is necessary that each one to write down an economic development strategy hereby attend to obtain the most opportunities which follow from the member statute. As regards the economic field, the main directions must be: the convergence process, the competitiveness and the policies regarding the demography, the employment and labour market.

Bibliography

Dăianu, D., „Is catching-up possible in Europe”, TIGER Working Papers Series, Warsaw, May 2002 Varblane, U. Vahter, P. (2005). An analysis of the economic convergence process in the transition

countries, University of Tartu, Faculty of Economics and Business Administration Kolodko, G., Globalization and catching-up in Transition Economies, University of

Rochester Press Pradeep, M., Selowsky, M. (2001). Transition: The first ten years, World Bank Rajasalu,, T. „Convergence in the European Union and Some Guidelines for Institutional

Reforms in Estonia”, in Factors of Convergence: a Collection for the Analysis of Estonian Socio-Economic and Institutional Evolution, 2001

WIIW. Handbook of Statistics. Countries of transition 2003, WIIW, Vienna, 2003


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EVOLUTIONS OF THE CONVERGENCE TOWARDS THE ACCESSION CONDITIONS

TO THE EUROPEAN MONETARY UNION OF SOME COUNTRIES RECENTLY INTEGRATED

INTO THE EUROPEAN UNION

Radu STROE

Ph. D. Professor Academy of Economic Studies, Bucharest

Abstract. This study aims to make a multicriteria analysis of the convergence to the

Maastricht criteria of the economic performances of certain center and south-east European countries, recently integrated into the European Union. It is obvious a fluctuant convergence on a differentiated trend on countries, owing to other economic and social priorities specific to each of the analyzed countries.

Key words: multicriteria analysis; accession conditions; convergence measure.

REL Classification: 8E, 8M, 16E, 18B, 18F.

As from 2004, a group of European central and south-eastern countries reached levels

of economic and social development ensuring them accession to European Union. Their next target inside this community was declared several times, by each country, as being taking over EURO currency till 2010-2013.

In this study I included 10 countries and I considered three out of the Maastrich indicators for their evolution between 2005-2008, with statistical data for 2005 and government predictions for 2008 (Table 1).

Maastrich indicators for some new EU members

Table 1 2005 2008 Country ri sb dp ri sb dp

Bulgaria 6,6 2,3 69,0 3,8 1,7 74,7 Czech Republic 2,2 -2,6 36,6 3,4 -3,1 41,8 Estonia 3,6 2,3 86,0 5,6 2,2 110,2 Latvia 7,0 -0,2 99,4 6,4 0,3 123,6 Lithuania 3,0 -0,5 49,0 4,0 -0,7 70,1 Poland 0,7 -2,9 43,7 2,6 3,5 44,1 Romania 8,6 -0,8 29,6 4,2 -2,9 24,1 Slovakia 3,7 -3,6 56,9 2,2 -2,5 46,9 Slovenia 2,4 -1,5 66,2 2,5 -1,6 54,6 Hungary 3,3 -6,1 73,2 3,7 -5,4 76,9

Note: ri = inflation rate (%, year per year) sb = rate in GNI of the budget balance(%) dp = rate in GNI of the public debt(%)


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The study has as subject the multicriteria analysis of these states evolution towards the above mentioned direction, their hierarchization and estimation of the convergence measure towards their taking over EURO currency. Out of the 10 countries, Slovenia is the only one having already taken over EURO currency. I considered it in this study because it is congruent to the other nine countries regarding the type of economy it started from, but also as a standard for the a-m countries for their evolution after accession to EURO currency.

The analysis I have made is by the polygon method, generated for each country and year by the three indicators considered in the study. The statistic or predicted values for each indicator was normed for the interval [0, 1] so that the most unfavorable value of the indicator should be expressed by “zero”, and the most favorable, by “one”. The intervals [minimum, maximum] for each indicator and norming formula are given in the table 2, where x represents the value to be normed.

Indicators evolution by polygon method Table 2

Indicator Minimum value m Maximum value M Norming formula Inflation rate 0% 10% (M – x) / (M - m) Rate in GNI of the budget balance -10% 4% (x – m) / (M - m) Rate in GNI of the public debt 10% 150% (M – x) / (M - m)

I expressed the measure on the convergence of each state to the target: “EURO” by

the covering level of the surface of the maximum area triangle, by the surface of the triangle generated by the normed level of the indicators considered in the study. This measure, as well as the contribution of each three indicators to its fulfillment, is offered in table 3.

Convergence measure for countries targeting Euro currency Table3

2005 2008 Factors contribution (%) Factors contribution (%) Country Conver-

gence measure ri sb dp

Conver-gence

measure ri sb dp Bulgaria 0,4547 18,7 40,1 41,2 0,5634 30,7 43,9 25,4 Czech Republic 0,6168 36,6 25,1 38,3 0,5292 34,7 23,5 41,8 Estonia 0,5441 32,5 46,9 20,6 0,3286 27,1 58,4 14,5 Latvia 0,2474 19,7 54,9 25,4 0,2043 27,9 61,2 10,9 Lithuania 0,6364 38,9 27,1 34,0 0,4851 32,5 36,9 30,6 Poland 0,4932 52,1 25,4 22,5 0,7540 38,1 19,8 42,1 Romania 0,3368 4,3 41,2 54,5 0,3922 39,9 18,7 41,4 Slovakia 0,4377 36,9 24,1 39,0 0,6004 39,2 24,2 36,6 Slovenia 0,5544 43,7 28,5 27,8 0,5932 33,1 28,7 38,2 Hungary 0,3068 47,2 15,0 37,8 0,3064 44,6 19,4 36,0

Increasing the convergence measure is made in five countries (Bulgaria, Poland, Romania, Slovakia and Slovenia). Because the information for 2008 are government predictions, this increase represents only a trend the governments propose for themselves and not a certainty, it being under the influence of the political stability and also of the natural elements. The fact that Slovenia is part to this group shows a continuation of its evolution in the direction it engaged itself when it proposed to itself to adopt EURO currency. Hungary shows a stationary situation within the studied interval. The other four countries (Czech, Estonia, Latvia and Lithuania) prove a diminishing in the convergence measure.

It is to be noted the role of the inflation rate as a factor of variation in the convergence measure: it is found with an important contribution both when it increases and when it diminishes. As well, it is remarked a tendency to radicalization showed by the states on their grouping according to the average of the convergence measure for 2005 (0,4628) (Table 4), and for 2008 (0,4756) (Table 5).


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Ranking of states according average convergence measure (2005) Table 4

Countries being under average (with at least 30%)

Countries being around the average (±7%)

Countries being over the average (with at least 18%)

Romania Hungary Latvia

Poland Bulgaria Slovakia

Lithuania Czech Republic Slovenia Estonia

Ranking of states according average convergence measure (2008) Table 5

Countries being under average (with at least 17%)

Countries being around the average

Countries being over the average (with at least 10%)

Romania Estonia Hungary Latvia

Lithuania Poland Slovakia Slovenia Bulgaria Czech Republic

On the background of increasing the convergence measure by 3%, it is noticed a diminishing of the advance towards the average both for the group of the countries being under the average and for the group of the countries being over the average, and also the quasi absence of the countries being around the average. So, the difference between the country belonging to the “under average” group and having the highest level in this group (Romania, both for 2005 and for 2008), on one hand, and the country belonging to the “over average” group and having the lowest level in this group (Estonia, for 2005, and Czech, for 2008), on the other hand, is reduced from 48% out of the average in 2005 to 27% out of the average in 2008. At the same time, the maximum/minimum ratio of the convergence measure increased from 2,6:1 in 2005(Lithuania versus Latvia) to 3,7:1 in 2008 (Poland versus Latvia). Also, there were multiple modifications on the structure of each group.

Estonia migrated from the “over average” group in 2005 to the “under average” group in 2008; Bulgaria, Poland and Slovakia migrated from the “around average” group in 2005 to the “over average” group in 2008; Lithuania migrated from the “above average” group in 2005 into the “around average” group in 2008; Czech passed from the top of the “over average” group in 2005 to the last position within this group in 2008.

Variation of the convergence measure between 2005-2008 and the contribution of the modification of level of the three indicators to this variation are presented in table 6.

Comparison of the factors levels in the interval 2005-2008 Table 6

Contribution of the modification of the factors level to the variation of the convergence measure in 2008 versus 2005

Variation of the convergence measure in

2008 versus 2005 ri sb dp Country

Physical units % Physical

units % Physical units % Physical

units % Bulgaria + 0,1087 + 23,9 + 0,1053 + 96,9 + 0,0091 + 8,4 - 0,0057 - 5,3 Czech Republic - 0,0876 - 10,3 - 0,0425 - 48,5 - 0,0304 - 34,7 - 0,0147 - 16,8 Estonia - 0,2155 - 39,6 - 0,0875 - 40,6 - 0,0634 - 29,4 - 0,0646 - 30,0 Latvia -0,0431 - 17,1 + 0,0084 + 19,5 - 0,0109 - 25,3 - 0,0406 - 94,2 Lithuania -0,1513 - 23,8 - 0,0543 - 35,9 - 0,0250 - 16,5 - 0,0720 - 47,6 Poland +0,2608 + 48,9 - 0,0169 - 6,5 + 0,1323 + 50,7 +0,1454 + 55,8 Romania +0,0554 +16,4 + 0,1422 + 256,7 - 0,0654 - 118,1 - 0,0214 - 38,6 Slovakia +0,1627 + 37,2 + 0,0747 + 45,9 + 0,0395 + 24,3 + 0,0485 + 29,8 Slovenia +0,0388 +7,0 + 0,0029 + 7,5 + 0,0014 + 3,6 + 0,0345 + 88,9 Hungary -0,0004 - 0,1 - 0,0079 - 1975,0 + 0,0134 + 3350,0 - 0,0059 - 1475,0


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For five countries the variation of the convergence measure is positive with levels between 7% and 49%, as follows:

− Slovenia and Romania with relatively high levels of 7%-16%; − Bulgaria, Slovakia and Poland with high levels over 24%; For four countries the variation of the convergence measure is negative with levels

between -10% and - 40%, as follows: − Czech and Latvia with relatively high levels -10%; -16%; − Lithuania and Estonia with high levels under -24%. Hungary is stationary. From the nine countries where the variation of the convergence measure is significant, it is

confirmed the major impact of the inflation rate at six countries for which the contribution brought by this factor is minimum 40% out of the variation in discussion. We mention for six countries as well, the significant contribution of the budget balance within 25% of the variation, but, especially, the massive contribution of the public debt, in general of a minimum 30%.

From the analysis of the congruence of the sense of the variation of the convergence measure with the direction of the factors’ contribution we could evaluate the consistency of the convergence policy of a certain country. So, Slovakia and Slovenia are consequent towards ampli-fying convergence: increasing its measure is made by the favorable contribution of all the three factors. We can discuss about a consequence on the opposite direction, on a convergence set-back, for Czech, Estonia and Lithuania: diminishing the convergence measure by means of a favorable contribution of all the three factors. As well, we can talk about an inconsistency of the conver-gence policy for Latvia, Poland and Romania for which the factors contribution is contradictory.

Conclusions: a) The ten-country group is placed, on average, between 2005-2008, to half way the

ideal situation, that is complete fulfilling of the three analyzed Maastricht conditions; in the analyzed period it is recorded on average only a 3% growth of the convergence measure;

b) Variation of their status is favorable for five of them, unfavorable for four of them and stationary for one of them;

c) there are relatively great differentiations of the convergence measure inside the group; we mention the maximum/minimum ratio; as well, the fact that some of the countries exceed 60% of the maximum measure of the convergence while others do not reach even 30%;

d) for three of the ten countries the convergence factors have not an homogenous contribution (some of them favorably influence, instead the others, unfavorably), which prove an insufficient determination for fulfilling the target called EURO;

e) there is a distortion between the priority of the declared strategic target to adopt the EURO currency and the operative economical, social and financial priorities of the analyzed period; four of the countries record an unfavorable variation of the convergence towards Maastrich conditions, one of them records a stationary position and other three a contradictory contribution of the convergence factors.

Bibliography

Stroe, Radu, “Risk and economic growth”, Analele Universitatii Dunarea de Jos, vol. 16,

Galati, 2006 Vacarel, Iulian (coordonator), Finante publice, EDP, Bucuresti, 2004 * * * Buletin statistic trimestrial, Institutul National de Statistica, vol. 1-4/2006, vol. 1-2/2007 * * * Emergin Europe Monitor, vol. 14, London, 2007 * * * Raport trimestrial, Banca Nationala a Romaniei, vol. 1-4/2006, vol. 1-2/2007


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THE IMPACT OF ACCESSION TO THE EUROPEAN UNION ON THE ROMANIAN CAPITAL MARKET

Dragoş MÎNJINĂ

Candidate Ph. D. Andrei STĂNCULESCU Candidate Ph.D. Assistant

Academy of Economic Studies, Bucharest Abstract. The accession to the European Union has had a significant impact on the

Romanian capital market. In this paper are presented some aspects of the capital market which are influenced by the mentioned event, such as a harmonized legislation with EU legislation and restructured capital market architecture. In order to synthesize the accession effect on the Romanian capital market, we have analyzed the specific market indicators (such as market value, turnover, market indexes etc.), computed for the pre and post-accession periods. The study also contains a comparative analysis of market indicators of the new member states of EU, from the same region, computed for corresponding periods of time. Also, the paper is focusing on the phenomena which are amplified by the EU accession, such as the correlation of the Romanian stock market prices’ evolution with the evolution of the prices from the capital markets of Central and Eastern European states new EU member, as well as the correlation with developed capital markets from Europe and United States, markets which determine the quotations’ evolutions from before mentioned capital markets. For this purpose, we calculate and study the correlation coefficients of Romanian indices with the indices of foreign stock exchanges.

Key words: market value; turnover; market index.

REL Classification: 11B

The functioning of Romanian capital market recommenced, after a pause since 1948 (determined by the nationalization of private property by the communist regime which interrupted the existence since 1882 of the first Romanian stock exchange) starting with the foundation of the legal framework for trading stocks, in 1994. This made possible the establishment of the Romanian National Securities Commission, the organizing and functioning of the Bucharest Stock Exchange, the issuance and trading of securities and the settlement of financial intermediaries’ brokerage activities and of investment consultants’ activities.

The actual trading began at the BSE on the 20th of November 1995. At the moment of reopening, only six companies were listed at the BSE, and at the end of the last trading session of 2006, on the 19th of December, the number of companies admitted for trade was 58(1). In September 1996, the RASDAQ market was officially opened and trading on this market began one month later. The RASDAQ market, which was modeled after the NASDAQ trading system from the United States, has been created in order to allow the shares’ trading of almost 6,000 companies which, due to the Mass Privatization Program, were partially privatized to the population. Ever since the market was created there have been


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made constant efforts for filtering the issuers which are traded on the RASDAQ market and in this manner, at the end of 2006, one could count 2,419 listed companies(2). In July 1997, the Sibiu Monetary-Financial and Commodities Exchange (SMFCE) has become the first derivatives exchange from Romania, including at present time the trading of futures and options contracts with the most liquid stocks listed at the BSE and foreign currencies as underlying assets.

The fulfillment of the commitments assumed in the negotiations for Romania’s accession to the European Union, officially launched on 15th of February 2000, and manly the need of consolidating the capital market in order to respond as effective as possible to the challenges of an economy which is increasing its integration with the economies of the European Union, have imposed the alignment of domestic capital market regulations to the European regulations and the restructuring of its institutional framework.

The numerous changes which affected the Romanian capital market legislation have peaked with the passing of the consolidated capital market law, which was approved in June 2004 and was put into force two months later. This legislation regarding capital market, modified in 2004, transposed the provisions of community regulations in this field and took into consideration a series of other documents, such as the conclusions of the World Bank Report regarding Romanian capital market, and the ones of the Organization for Cooperation and Economic Development (OCED), regarding the principles of corporate governance. The Law no. 297/2004 regarding capital market and the secondary issued (or which are to be issued) regulations for its application pursue to implement several concentrated measures regarding the enhancement of market transparency, the correct and complete information of investors, the supervision and control of regulated markets, in order to prevent the potential negative effects and to identify the potential risks(3).

The harmonization of capital market legislation with the one of the EU continued in 2005, year in which finalizing and implementing the secondary legislation for applying Law no. 297/2004 had represented a major goal of the Romanian National Securities Commission (RNSC)(4). Regulations have been reanalyzed, pursuing furthermore the harmonization with the main directives, issued by the European Union, with impact over the capital market:

a) Directive no.2004/25/EC regarding public takeover bids; b) Directive no.2004/39/EC regarding financial instruments markets (MIFID); c) Directive no.2004/72/EC regarding accepted market practices, the definition of

inside information, the elaboration of the list of persons who posses inside information, the notification of transactions undertaken by administrators and suspect transactions;

d) Directive no. 2004/109/EC regarding the alignment of transparency requirements for the information about issuers whose securities are admitted for trade on a regulated market.

In 2006, the RNSC recorded a significant progress in the direction of aligning national regulations to the community legislation in the capital market field, as adopted by the European Commission. Romania is the first state which totally adopted the European legislation regarding financial instruments’ markets(5). The notification of this fact has been made possible after the approval of Regulation no.32/2006 regarding financial investment services and of Regulation no. 31/2006 which completes the RNSC regulations in order to implement several provisions of the European Directives.

Regulating effort made by the Romanian National Securities Commission for aligning with the EU standards and mechanisms, was accompanied by a similar effort from the auto-regulating organisms(6). In this direction, the BSE adopted in 2006 a “Code of Practice” which sums up all the regulation to carry out transactions on the stock market. The Code contains provisions regarding(7):

a) a new structure for the regulated market administered by the BSE; b) much more precise criteria for assessing the liquidity which must be fulfilled by

the securities admitted for trading;


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c) reducing the time an issuer is suspended as a result of a corporate event; d) increasing flexibility in adopting suspension decisions of the maximum variation

limit of the stock price (+/- 15%); e) regulation of more elaborate trading techniques such as the “margin” purchases and

the “short” sales. The changes within the regulating framework of the capital market have also been

completed by the modifications of market architecture. Thus, in 2005, the Bucharest Stock Exchange transformed itself, from a public law entity in a joint-stock company and merged with the Electronic Stock Exchange Rasdaq S.A. Consequently, in the first part of the year 2006, along with the authorization as a market operator that BSE received from the RNSC, there officially ceased to exist the atypical situation (especially for a market with a capitalization less than 20 billion euro) for the Romanian capital market, which more than 10 years functioned in parallel with two markets and distinct systems, where shares of the Romanian issuing companies could be traded. In the year 2005, there was formed the Investors Compensation Fund which reached in 2006 the minimum compensation limit of 2,000 euro, settled within the accession negotiations. The compensation limit will be gradually increased until 1st of January 2012, up to the amount of 20,000 euro, which is stipulated by the Directive 97/9/CEE regarding investors’ compensation schemes. In 2006, the consolidation of the compensation-settlement system had been ensured by founding the Central Depositary S.A. The unification of stock markets and the foundation of the Central Depositary and the Investors Compensation Fund have led to the creation of a modern and compact infrastructure, which represents a strong point of the Romanian capital market(8).

Despite the mentioned achievements and the favorable macroeconomic context from the recent years, the degree of financial depth of the capital market continues to be low, but still a positive trend is recorded (see Table 1(9)).

Financial system structure

Table 1 Financial Intermediation Institutions 2002 2003 2004 2005 2006 Credit institutions (1) 31,0 30,8 36,6 44,6 50,6 Insurance companies (2) 1,5 1,8 1,9 2,2 2,5 Investment funds (3) 0,1 0,1 0,2 0,2 0,3 Financial investment companies (SIFs) (4) 1,4 1,4 1,3 1,8 2,3 Leasing companies (5) 1,5 1,8 3,0 3,6 3,4 Other institutions involved in financing activities by credit nature (6)

0,4 0,4 0,6 0,9 1,3

Total 35,9 36,3 43,6 53,3 60,4 Other financial institutions BSE (7) 6,1 6,2 13,9 19,5 21,5 RASDAQ (BER) (7) 4,0 4,0 3,2 2,9 3,1 Source: NBR, RNCS, ISC, NFI, NIS (data for 2006 are provisional) 1) Net assets of credit institutions, including CREDITCOOP; 2) Value of total assets; 3) Assets of investments funds; 4) Net assets of closed-end investment funds (SIF); 5) Net assets financed; 6) Total assets of companies that carry on consumer loan borrowing activities, guarantees issuance and engagements assuming activities, microcredit activities, as well as of that which carry on multiple loan activities; 7) Market capitalization.

The comparison between the Romanian capital market and similar markets from Poland,

Czech Republic and Hungary confirms the existence of a low degree of financial depth in relation with similar markets from the region (Table 2). From the point of view of the market capitalization, in the period 2003 - October 2007, the most powerful stock exchange from the Eastern and Central Europe is the one from Poland (242.71 billion euro market capitalization as at the end of October 2007 and 62.07% of GDP as at the end of last year) sustained by spectacular increases in 2006 and 2007 (+50.78% in 2006 and, respectively + 46.23% in 2007). The


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spectacular evolution of the Warsaw Stock Exchange can mainly be attributed to the increase of trust and interest in this market, which has its origin before the integration, influenced, alongside other factors (such as: the enhancement of the credibility of Poland’s economy as a whole, the big expected earnings as compared to other countries which were about to be included in the EU and signing up for international markets trends and tendencies long before accession), by the integration expectative and its accomplishment(10).

Indicators of capital markets from Central and East-European countries

between 2003 – October 2007 Table 2

Market capitalization (euro bln) 35.56 71.51 110.08 165.98 242.71 Capitalization variation (%) - 101.13 53.94 50.78 46.23 Market capitalization/GDP (%) 18.62 35.05 45.30 62.07 n/a Turnover (euro bln) 8.46 14.53 24.75 43.66 55.12 Turnover variation (%) - 71.80 70.39 76.37 26.25 Turnover/market capitalization (%) 23.78 20.32 22.49 26.30 22.71

Poland

WIG index return (%) 44.92 27.94 33.66 41.6 25.22 Market capitalization (euro bln) 13.23 20.86 27.59 31.69 33.53 Capitalization variation (%) - 57.67 32.26 14.86 5.82 Market capitalization/GDP (%) 17.88 25.75 31.35 35.53 n/a Turnover (euro bln) 7.05 10.42 19.42 24.63 27.63 Turnover variation (%) - 47.70 86.45 26.79 12.20 Turnover/market capitalization (%) 53.31 49.94 70.40 77.71 82.39

Hungary

BUX index return (%) 20.38 57.20 41.00 51.10 10.22 Market capitalization (euro bln) 19.89 32.10 45.88 57.90 67.83 Capitalization variation (%) - 61.39 42.94 26.20 17.15 Market capitalization/GDP (%) 24.86 36.89 46.82 51.42 n/a Turnover (euro bln) 8.07 15.04 34.96 29.95 31.38 Turnover variation (%) - 86.38 132.46 -14.33 4.78 Turnover/market capitalization (%) 40.57 46.85 76.19 51.72 46.26

Czech Republic

PX index return (%) 43.06 56.58 42.73 7.87 20.10 Capitalization variation (%) - 81.25 47.47 39.23 34.63 Market capitalization/GDP (%) 19.91 33.46 42.79 54.47 n/a Turnover variation (%) - 69.58 97.92 24.13 16.18 Turnover/market capitalization (%) 34.33 32.12 43.11 38.44 33.17

Poland, Hungary,

Czech Republic

Group Weighted average return of indices (%) 39.66 40.23 37.03 35.14 22.75 Market capitalization (euro bln) 4.89 10.62 17.48 24.85 35.38 Capitalization variation (%) - 117.27 64.51 42.19 42.36 Market capitalization/GDP (%) 9.23 17.42 22.13 25.65 n/a Turnover (euro bln) 0.34 0.76 2.42 3.18 3.64 Turnover variation (%) - 119.85 218.88 31.45 14.43 Turnover/market capitalization (%) 7.05 7.13 13.83 12.78 10.27

Romania

BET index return (%) 30.90 100.96 50.90 22.23 23.60 Market capitalization (euro bln) 1.39 2.05 4.32 7.83 14.02 Capitalization variation (%) - 47.00 110.74 81.52 78.94 Market capitalization/GDP (%) 7.74 10.24 20.55 32.24 n/a Turnover (euro bln) 0.13 0.44 1.02 1.42 3.30 Turnover variation (%) - 227.42 133.15 38.65 132.43 Turnover/market capitalization (%) 9.63 21.45 23.73 18.13 23.55

Bulgaria

SOFIX index return (%) 148.16 38.00 32.38 48.28 58.03 Sources of data used: www.gpw.com.pl, www.bse.hu , www.pse.cz , www.bvb.ro , www.bse-sofia.bg, www.alphafinance.ro and http://epp.eurostat.ec.europa.eu, CNVM, 2007: pp. 86, own calculations. Notes: - for market capitalization/GDP indicator, GDPs (in current prices) for 2003 – 2005 years are extracted from Eurostat yearbook 2006-2007 and those for 2006 is taken from BVB, 2007: pp. 43; - turnover refers only to equities; - market capitalization includes foreign companies too where these are listed; - market capitalization for Bulgaria in the last column is as at 11/16/2007.


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At the end of 2006, Romania was on the 4th place with regards to market capitalization, being afterwards Czech Republic and Hungary, with a capitalization of 24.85 billion euro, representing 25.65 % of GDP. However, at the end of October 2007, the Romanian capital market succeeded to surpass the Hungarian market capitalization, due to a very good increase (+42.36%, which has been determined, like in 2006, by ascendant evolution of the majority of traded securities’ quotations and by capital increases operated by some companies through reserves incorporations or cash subscriptions; new listings have not contributed to this increase, unfortunately, until October), alongside to the slowing of Hungarian capitalization increase (an increase of only +5.82%). This evolution was facilitated by a faster evolution of prices on Romanian market in 2007, BET index increasing by 23.60%, compared to a 10.22% increase for the BUX index.

The same forth place is occupied by Romania among the countries analyzed from the point of view of turnover too, which has remained at a level much lower than those of the other markets (in 2006, the turnover in Romania was of 3.18 billion euro, while Poland has had a turnover of 43.66 billion euro, Czech Republic – 29.95 billion euro and Hungary – 24.63 billion euro). Taking into account the low level of turnover in 2006 for Romania, at the end of October 2007, the liquidity of our capital market (10.27%) was surpassed by that of the Bulgarian capital market (23.55%), which has been the beneficiary of an impressive increase of the turnover (+132.43 %); this has placed the Romanian capital market on the last place in the region from this point of view (in the period January – October 2007, the liquidity in Hungary was of 82.39%, in the Czech Republic was of 46.26% and in Poland – 22.71%).

Comparing the value of the indicators Market capitalization/GDP and Turnover/Market capitalization at the level of the region composed of Poland, Czech Republic and Hungary, with those of Romania, it is observed in the analyzed period, a tendency of reducing the existing lags due to superior growth rhythms attributed to those of the analyzed group, both at the level of market capitalization and at turnover level. However, these delays are still at a high level (in 2006, the Romanian capital market indicators were at the level of 45% from the indicator Market capitalization/GDP of the analyzed countries and at a lower level, 33%, from the Turnover/Market capitalization), but the potential of the Romanian capital market is very high because there are expected listings of big companies in the first years following the EU accession(11). The comparison of the weighted average return of the main indices of the analyzed country group (including Poland, Czech Republic and Hungary) with the return of the BET index for the period January 2003 - October 2007, leads to the observation of a similar evolution (positive), with higher returns of the Romanian capital market in the years 2004 (+100.96% compared to +40.23%), 2005 (+50.90% compared to +37.23%) and 2007 (+23.60% compared to +22.75%), and lower returns in 2003 (+30.90% compared to +39.66%) and 2006 (+22.23% compared to +35.14%). This index return evolution represents a signal of the correlated prices’ evolution from these markets.

The correlation of the markets from Central Europe which joined EU in 2004 has been in the attention of the capital markets participants for a longer period of time, a good sign in this respect being the inclusion in the statistics, published by the Budapest Stock Exchange, of the correlation coefficients of the main indices from the mentioned markets, CESI index included(12). In Table 3 are presented the values of these coefficients from 2003 until 2006(13). One can observe the positive and significant correlations between the daily variation of CESI, WIG, BUX and PX 50, especially the strong correlation between the CESI index and the BUX and WIG indices (in 2005, the proper correlation coefficients recorded the value of 0.84), and the moderate correlation between CESI index and PX50 (0.72, in 2005), but also a moderate correlation of the Budapest Stock Exchange with those from Warsaw (0.66, in 2005) and Prague (0.50, in 2005), and that between the stock exchanges from Warsaw and Prague (0.41, in 2005).


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Correlation of Central Europe indices daily returns 2003-2006 Table 3

BUX (Budapest) PX50 (Prague) SAX (Bratislava) SBI (Ljubljana) WIG (Warsaw) 2003 2004 2005 2006 2003 2004 2005 2006 2003 2004 2005 2006 2003 2004 2005 2006 2003 2004 2005

BUX 1.00 1.00 1.00 1.00 PX50 n/a 0.26 0.50 0.50 1.00 1.00 1.00 1.00 SAX n/a -0.44 0.05 0.05 n/a -0.06 0.06 0.06 1.00 1.00 1.00 1.00 SBI n/a -0.41 0.28 0.28 n/a -0.20 0.06 0.06 n/a -0.03 -0.04 -0.04 1.00 1.00 1.00 1.00 WIG 0.54 0.55 0.66 0.66 n/a 0.44 0.41 0.41 n/a 0.05 0.40 0.40 n/a -0.36 0.03 0.03 1.00 1.00 1.00 CESI n/a 0.64 0.84 n/a n/a 0.81 0.72 n/a n/a -0.15 0.21 n/a n/a -0.41 0.17 n/a n/a 0.74 0.84

Source: Annual statistics published by Budapest Stock Exchange.

Considering the Romanian capital market, one can observe(14) the correlated evolution, both with the Central European capital markets which adhered the EU in 2004 (Poland, Hungary, Czech Republic) and also with the developed capital markets of the United States and Western Europe. The NBR analysis identifies, regarding the emergent East European markets, “a similar behavior of investors regarding this region”, based on the existence of a linear relationship between the liquidity of the markets and the degree of adjustment from between April-June 2006 (NBR, 2007: pp. 43-44). The suggested explanation consists in: 1) the existence of initial shocks generated by foreign investors’ exits, which were proportional with the size of the markets or with their participation, followed by local reactions, which were amplified by the existing degrees of liquidity; 2) the presence of the pure contagion phenomena, caused by the behavior of “following” the neighboring markets, which was amplified, on the same basis as the local reactions mentioned before, by the leverage effect which is present on all the markets. According to the NBR report, these adjustments were determined by profit cash-out and portfolios’ resettling, caused by the reorientation of institutional investors towards other markets, in the context of a global adjustment (which took place in the period described above), induced by an unfavorable international context.

In this manner, our attention is drawn by a mechanism through which economic evolutions on developed markets, initially reflected on the developed capital markets, influence the evolution of the emergent capital markets and also the role of foreign investors, who apply similar strategies for the regional markets, as this mechanism is unfolding. Despite a reduced presence of nonresidents at the BSE (where liquidity is induced in a degree of about 70% by local investors), the impact of their decisions has increased considerably. The BNR report underlines that between the monthly returns of the BET index and the weight of net purchases undertaken by nonresidents, in total transaction volume, there is a correlation which maintains itself at high positive levels; this suggested to the report’s authors the idea that the effect of nonresidents’ net purchases induces price rising. Domestic investors mostly “follow” the market and mark profits, at the risk of losing their market position.

By analyzing the correlation coefficients between the BSE indices (BET, BET-C and BET-FI) and the capital market indices from Europe and the United States, from the period 2003-October 2007 (see Table 4), the continuous increase of correlation between these indices appears as obvious, as current year correlation coefficients record maximum levels, due to several consistent increases; this implies that the accession to the EU has had a significant influence over the prices’ evolution of the stocks listed on the Romanian capital market. As mentioned before, a possible explanation for this could reside in the penetration, on Romanian capital market, of several foreign investors (including the ones which were restricted to place their funds in EU member states or states with a certain degree of risk), who “follow” the same strategies regarding a specific region. At the same time, one cannot overlook the influence which has been exerted, since the summer of last year, by the


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unfavorable international financial markets context, determined by the mortgage crisis from the United States, which led to increased risk aversion, with negative consequences over investors’ behavior towards emergent markets (the mechanism from between April-June 2006, mentioned before, is unfolding again) and to a world-wide liquidity crisis.

Correlation coefficients between Romanian capital market’s indices and other world

capital markets’ indices Table 4

BUX PX WIG SOFIX DJIA S&P500 FTSE100 DAX CAC40 ATX 2005 0.03 0.15 n/a 0.07 0.09 0.07 0.07 0.04 0.04 0.02 2006 0.11 0.13 -0.03 0.15 0.07 0.10 0.07 0.09 0.09 0.14 BET 2007 0.32 0.35 0.27 0.15 0.40 0.42 0.31 0.31 0.30 0.35 2005 0.02 0.14 n/a 0.06 0.08 0.06 0.07 0.04 0.02 0.02 2006 0.11 0.12 -0.05 0.15 0.07 0.09 0.07 0.09 0.08 0.12 BET-C 2007 0.34 0.37 0.27 0.18 0.47 0.49 0.34 0.34 0.32 0.40 2005 0.06 0.08 n/a 0.01 0.14 0.12 0.02 0.02 0.00 0.06 2006 0.21 0.19 0.03 0.15 0.17 0.18 0.14 0.17 0.14 0.18 BET-FI 2007 0.47 0.42 0.37 0.09 0.43 0.47 0.39 0.40 0.42 0.44

Sources: www.bse.hu, www.pse.cz, www.bvb.ro, www.bse-sofia.bg, http://finance.yahoo.com/indices and own calculations. Note: - for correlation coefficients calculation have been used the close values of indices; - for the calculation of correlation coefficients with DJIA and S&P 500 the values of BSE indices from t day have been translated to day t+1 day because it has been considered that the evolutions of US indices fom day t are included in BSE indices from day t+1; - correlation coefficients with WIG index for 2006 were calculated for August – December 2007.

It can be observed that the accession to the EU has had important consequences

regarding to the correlation with both the European capital markets and the United States capital market (which increased to medium levels in 2007, as compared to the insignificant levels recorded in 2005). In 2007, there was noticed a positive medium correlation between the BSE indices and the majority of European indices, both with the ones from Central and Eastern Europe (the correlation coefficient of BET-C with: BUX, in 2004, is 0.34, with PX is 0.36, with WIG is 0.27, and with ATX is 0.40) and with the ones from Western Europe (the correlation coefficient of BET-C with FTSE100 is 0.34, with DAX is 0.34 and with CAC40 is 0.32), but also a weak correlation with the evolution of the Bulgarian stock market (the correlation coefficients between the BSE indices and the SOFIX index have values in the interval 0,09-0,15, in 2007). Also, in 2007 there is a medium positive correlation between the BSE indices and those from United States too (the correlation coefficient of BET-C with DJIA is 0.47 and with S&P 500 is 0.49). At the level of BET-FI index there is a more powerful correlation of Romanian capital market with European markets, not considering the correlation with the capital market from Bulgaria, and with United States capital market(16).

In conclusion, the accession to European Union has had direct positive effects for the capital market’s legislation, which has been brought in line with the European legislation, and for the capital market architecture. The capital market’s indicators, although they are still at low levels as compared to those of similar markets from Central and Eastern Europe (such as Poland, Hungary and Czech Republic), have recorded positive evolutions over the last years, that have contributed to the reduction of the lags regarding the mentioned markets, as a consequence of the increased attraction of Romanian economy, due to the UE accession process. The effective accession has been accompanied by a significant increase of the correlation degree of Romanian capital market with the European and the United States capital markets, due to the increase of the participation and importance of foreign investors for this market.


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Notes

(1) According to BSE, 2007: pp. 18. (2) According to RNCS, 2007: pp. 79. (3) According to RNCS, 2005: pp. 13. (4) The objective is mentioned in RNCS, 2006: pp. 11. (5) According to RNCS, 2007: pp. 17. (6) These statute was granted to BSE and SMFCE by RNCS. (7) According to BSE, 2007: pp. 16 – 17. (8) According to the SWOT analysis from RNCS, 2007: pp. 70. (9) The table has been taken from NBR, 2007: pp. 13. (10) According to opinion of Lidia Adamska, memeber of Warsaw Stock Exchange’s Board

of Directors, presented in Sârbu, N., 2006: pp. 63. (11) According to BSE, 2007: pp. 43. (12) CESI index is the index of Central Europe stock exchanges: Czech Republic, Hungary,

Slovakia, Poland, Austria and Slovenia. (13) The existence of an identical correlation coefficients in 2005 and 2006 can rise

questions regarding the accuracy of data published by Budapest Stock Exchange for these years.

(14) The correlation with the mentioned foreign markets has been observed inclusively by capital markets participants and in financial press, as results from BSE, 2007: pp. 48, Paşol, R., 2006: pp. 30 -31, Paşol, R., 2007, Popescu-Buzeu, R., 2007, Chirileasa, A., 2006.

(15) If in 2005 only the individual resident investors has been net sellers, in 2006 both individual resident investors and legal entities resident investors, have desinvested in the favor of foreign investors according to BSE, 2007: pp. 45.

(16) BET-FI index reflects the evolution of financial investments companies’ prices, companies that have in the shareholder’s structure foreign investors and speculative resident investors, that represent a favorable premise for a strong correlation of their prices’ evolutions with those of prices from foreign markets.

Bibliography

Chirileasa, A., „Bursa începe să se mişte după celelalte pieţe europene, dar brokerii se plâng că statul le pune beţe în roate”, Ziarul financiar, 26.05.2006, article published in http://www.zf.ro/articol_84871.

National Bank of Romania, „Raport asupra stabilităţii financiare.” (2007). Paşol, R., „Aderarea la Uniunea Europeană şi pieţele de capital.” Revista I&P, nr. 10,

(2006): pp. 30 -31. Paşol, R., „Ce pieţe urmărim?” Plus Capital nr. 450, (2007). Popescu-Buzeu, R., „Despre corelarea pieţelor”, Business Standard, 06.09.2007, article

published in http://www.standard.ro/articol_11654. Romanian National Commission for Securities (RNCS), „Raport de activitate 2004.” (2005). Romanian National Commission for Securities (RNCS), „Raport de activitate 2005.” (2006). Romanian National Commission for Securities (RNCS), „Raport de activitate 2006.” (2007). Bucharest Stock Exchange (BSE), „Raport anual 2006.” (2007). Sârbu, N., „Unde ne-ar putea aduce valul integrării?”, Revista I&P, nr. 9, Octombrie 2006:

p. 63.


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APPLYING THE BINOMIAL MODEL IN CASE OF EVALUATING CERTAIN DERIVATIVES

Dan ARMEANU Ph. D. Senior Lecturer

Carmen OBREJA Ph. D. Lecturer


Abstract. The purpose of this article is to prepare an analysis of the most traded options

on the stock and commodities exchange by using the Binomial Model. The main indicators of sensitivity are calculated and interpreted, and it is shown that, on long term the solutions of this model converge to the solution offered by the Black – Merton – Scholes Model. Bringing in the futures and options contracts have determined the transformation of the commodities exchange into a national and regional center where the participants have the possibility to cover their risks or to speculate the modification of the prices by using derivatives.

Key words: derivatives; options; futures; arbitrage; volatility. REL Classification: 11B

Derivatives have a very important role in modern finance, being used on a large scale by the companies, especially for protecting themselves against various financial risks related to their field of activity, and also by various companies and individual investors that aspire to a fast and considerable earning gained from speculations standing on such instruments.

We shall start from the hypothesis that there are no arbitrage opportunities in the market. We consider S0 the course of support share at zero moment, considered to be the initial moment. Starting with this moment, the share course will either increase with an increase factor, noted with “u” (“up”), or decrease with a decrease factor, noted with “d” (“down”), the reverse of increase factor (d=1/u).

Taking into account that stock exchange environment is an uncertain one, we consider that the price of the support share shall increase up to the next moment with the probability “p” or shall decrease with the probability “1-p”.

For example, we shall consider a scheme with 3 moments in time, the period being equal and measured in years.


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S0 x u3

S0 x u2 S0 x u S0 x u

S0 S0xuxd S0 x d S0 x d

S0 x d2

S0 x d3

∆t ∆ t ∆t t0 t1 t2 t3

This Δt shall be calculated by dividing the duration up to the maturity to the number

of steps we take into consideration. The distribution shall be as follows:

pdS

puS

St −××

1: 00

1 having the average (the expected value):

E(St1) = p x S0 x u + ( 1 - p ) x S0 x d The fructification factor, u, calculated in continuous time takes into account the risk,

e.g. the volatility of the support share course (σ). Thus: teu Δ×σ= , and teu Δ×σ−=

This volatility of the support share course is expressed in percentage per year. Its links with the daily volatilities (in fact the deviations of the share course) results from the relation:

σ2an = σ2

zi x 252 (number of stock exchange days when the transshares are done during a calendar year).

As: σzi = σan x 252/1 , it results that we can generalize the formula of the volatility estimated for a period of time Δt, in relation with the daily volatility, as being: σΔt = σan x

tΔ We consider an investment starting from the initial amount S0 without risk, for

example making a banking deposit. Then, S0 fructified shall be S0 x erx∆t, where erx∆t = fructi-fication factor without risk (growth factor per step).

Since we assumed that there are no arbitrage opportunities, it results: p x S0 x u + S0 x d - p x S0 x d = S0 x erxΔt

dudep

tr

−−

=Δ×

= neutral probability to risk (investors are neutral to risk)

As it results from the scheme constituted as an example starting from the point t0, it can be calculated future courses of support share. In order to evaluate the option based on this support, we shall start from tn to t0, using the actualization factor e-rx·∆t (discount factor per step). We shall determine step by step the value of the option at 0 moment, which shall be noted with c0.

The link between the 2 prices is very simple. Thus, in the example above we considered 3 moments. On the moment t3 , the course of support share is S3. Let us suppose that we have a buying option CALL, of European type.

At the maturity, in case ST is higher than the exercising price (E), the investor shall earn the difference (ST – E). If ST is lower than the exercising price (E), the investor shall not exercise his option.

Thus, CT = max (0; ST – E ).


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In our case, if S3 > E, the option shall be exercised. Starting from this difference, it shall be calculated the price of option for every moment. We shall re-write the scheme from the example above for the option price:

C0 x u3

C0 x u2 C0 x u C0 x u

C0 C0 x u x d

C0 x u C0 x d

C0 x d2

C0 x d3

Where C0·x u and C0 x d are the values of option after the first moment of time, in

case the option value has increased or decreased. We consider a portfolio formed by h units of the support asset, long position and a

short position bond. This portfolio shall have the same evolution as initial option. P = h x s – B Thus, after ∆t = t1 – t0, the portfolio shall be:

u x h x s – (1+r) x B u x C0 = Cu P0 , and its value C0

d x h x s – (1+r) x B d x C0 = Cd

After equalizing the branches, it results: Cu = u x h x s – (1+r) x B (1) Cd = d x h x s – (1+r) x B (2) But Cu = max (U x S0 – E; 0), and Cd = max (d x S0 – E; 0) By subtracting equations (1) and (2), it results:

SdUCCh du

⋅−−

=)(

and replacing, it results

dnCUCd

rB du

−×−×

×+

=1

1

duCrUCdr

rP du

−×+−+×−+

×+

=))1(()1(

11

0

The sum of the coefficients of Cu and Cd from this ratio is 1, and they are >0 (d<1 + r<u)

It results that: du

drP−−+

=)1(

0 Probability = p

Thus: q=1-p As there is no arbitrage possibility that P0 = C0, it results that:

))1((1

10 du CpCp

rC ×−+××

+=

C0 = e - rxΔt x [ pxCu + (1 – p) x Cd ] (using the continuous interest) On the next moment t2, the scheme is as follows:


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52

C x u2 C x u

C0 C x u x d

C x d

C x d2

C0 = e - rxΔt x [ p x C u2 + (1 – p) x Cud ] Cd = e - rxΔt x [ p x Cud + (1 – p) x Cd

2 ] Then, C0 = (e – rxΔt)2 x [ p2 x Cu

2 + 2 x p x (1 – p) x Cd2 ] , sau :

C0 = (e – rxΔt)2 x [ C20

x p2 x C x u2 + C21

x 2 x p x (1 – p) x Cud + C22 x (1-p)2 x C x u2 ]

Generalizing, it results that: C0 = (e – rxΔt)n x ∑=

n

k 0

( Cnk x pn-k

x (1 – p)k x Cun-k x dk ),

Where Cun-k x dk represents the option value on final moment n, incase it increased

(n-k) times and decreased k times.

Or: C0 = (e – rxΔt)n x ∑=

n

k 0

Cnk xpn-kx(1 – p)k max (un-k dkxS0-E,0)

The option value shall be zero (option shall be out of money) when: un-kxdkxS0 ≤ E u-kxdk

≤ E/S0xun

kxln(d/u) ≤ ln (E/S0xun) k ≤ ln (E/S0xun) / ln(d/u) We shall note L=[k]+1, where [] represents the whole part of a number. Thus:

C0 = (e – rxΔt)n x ∑=

L

k 0

Cnk xpn-k x (1 – p)kx(un-kxdkxS0-E)

C0 = S0 x∑=

L

k 0

Cnk x (pxu /e rxΔt)n-k x[(1-p)xd /e rxΔt]k - (e – rxΔt)n xEx∑

=

L

k 0

Cnkxpn-kx(1 – p)k

We note Θ = pxu / erxΔt > 0; Θ >1; pxu / erxΔ + (1-p)xd /erxΔt = 1 => Θ = probability

C0 = S0 x∑=

L

k 0

Cnk x Θ n-k x (1 – Θ) k - (e – rxΔt)n xEx∑

=

L

k 0

Cnk xpn-k x (1 – p)k

C0 = S0xB(n, L, Θ) - (e– rxΔt)n xExB(n, L, p) B(n, L, Θ) = binomial scheme characterized by n extractions, out of which L are

favorable, the probability being Θ. B(n, L, p) = binomial scheme characterized by n extractions, out of which L are

favorable, the probability being p. When n increases a lot, the binomial distribution trends to normal distribution, e.g. the

model Black-Merton-Scholes. Thus, B(n, L, Θ) trends to N(d1) and B(n, L, p) trends to N(d2). In this study case, I shall estimate the volatility taking into account the historical data. For this

purpose, the share price should be followed at fixed periods (for example, daily, weekly, monthly). We shall define: n+1 = number of observations Si = share price at the end of period i; i=0,n We note:

1−

×=i

ini s

slu , i=1,n


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s= estimation of standard deviation of ui

∑ ∑= =

×−×

−×−

=n

i

n

iii u

nnu

ns

1 1

22 )()1(

11

1

Volatility for 1 year is: yearperdaytradingofnumbersan ×=σ

Standard error is: nsobservatioofnumber

an

⋅

σ

2

Generally, we choose between 90 and 180 days for observations, as a longer period of time could be not relevant for forecasting a future volatility. It is advisable to take into account a number of observations equal with the number of days for which the volatility shall be applied.

In case the support share pays the dividend ui = ln (Si+D) / Si-1, D = dividend value, for the other observations ui remains equal with ln Si / Si-1

Generally, the annual volatility is between 15% and 60% for shares. We made an analysis for one of the most traded derivatives at Sibiu, e.g. DESIF2. Evaluation of put option DESIF2 with maturity on March 2008

For each node we calculated 2 values: Above value = Price of support share Below value = Option price Red noted values are the results, at the maturity, in case of trading the option. Exercise rate = 3,08 Exercise price = 3,4 Actualization factor (without risk ) = 0,9903 6.47634 Period of time between nodes, dt = 0,1500 years, 54,75 days 0 Fructification factor without risk, a = 1,0098 5.58179 Growth probability, p = 0,4957 0 Growth factor, u = 1,1603 4.81081 4.81081 Decrease factor, d = 0,8619 0 0

4.14631 4.14631 0.09282 0 3.5736 3.5736 3.5736 0.27108 0.18588 0

3.08 3.08 3.08 0.50179 0.4516 0.37224

2.65457 2.65457 2.65457 0.73836 0.72161 0.74543 2.28791 2.28791 1.03462 1.0791 1.97189 1.97189 1.36245 1.42811 1.69953 1.66749 1.46478 1.93522

Period (years)

0.0000 0.1500 0.3000 0.4500 0.6000 0.7500


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I evaluated these derivatives using the binomial model and the model Black-Merton-Scholes, showing by graphs how the solutions in the binomial model converge in time to the solution given by the model Black-Merton-Scholes.

Table 1

0,00

0,10

0,20

0,30

0,40

0,50

Number of steps

Opt

ion

valu

e

Modelul Binomial 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

Modelul Black-Merton-Scholes 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

2 3 4 5 6 7 8 91

0

1

1

1

2

1

3

1

4

1

5

1

6

1

7

1

8

1

9

2

0

2

1

2

2

2

3

2

4

2

5

2

6

2

7

2

8

2

9

3

0

3

1

3

2

3

3

3

4

3

5

3

6

3

7

3

8

3

9

4

0

4

1

4

2

4

3

4

4

4

5

4

6

4

7

4

8

4

9

5

0

Convergence of the solutions offered by the Binomial Model to the solution offered by the Black-Merton-Scholes Model (put DESIF2)

As to the interest rate without risk, we considered 6,5% the interest rate offered by the

Ministry of Finance for bonds issued in April 2007. For these derivatives I chose the most distant maturities offered by the Sibiu stock

exchange, so that the calculations are more relevant. I have calculated the volatility of these financial instruments using the historical data,

taking into account the last 180 observations. I have also taken into account the dividends resulted this year by SIF2 in amount of 0,063.

Bibliography

Anghelache, G. (2001), “Piata de capital. Caracteristici. Evolutii. Tranzactii”, Editura

Economica, Bucuresti Bodie, Z., Kane, A., Marcus, A. (2003), “Essential of investments”, 5th Edition, McGraw-Hill Briys, E., Mai, N.M., Bellalah, M., de Varenne F. (1998), “Options, futures and exotic

derivatives”, John Wiley & Sons Hull, J. (2006), “Options, futures and other derivatives”, 6th Edition, Prentice Hall Jorion, P. (2003), “Financial risk manager”, 2nd Edition, John Wiley & Sons Kolb, R. “Understanding options”, John Wiley & Sons, 1995 Reuters (2001). “Introducere in studiul produselor financiare derivate”, Editura Economica,

Bucuresti, 2001 Rubinstein, M., “Rubinstein on derivatives”, Risk Books, 1999 Wilmott, P., “Derivative. Inginerie financiara. Teorie si practica”, Editura Economica, Bucuresti Stancu, I. (2002), “Finante. Teoria pietelor financiare. Finantele intreprinderii. Analiza si

gestiunea financiara“, Editura Economica, Bucuresti, 2002 *** Bank for International Settlements, “Statistics. Derivatives” (www.bis.org) *** Bursa de Valori Bucuresti, Rapoarte de piata (www.bvb.ro) *** Bursa Monetar Financiara si de Marfuri Sibiu (www.bmfms.ro) *** International Swaps and Derivatives Associacion, “Surveys and Markets Statistics”

(www.isda.org)


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THE FOREX MARKET – AN ALTERNATIVE TO THE STOCK MARKET

Oana DAVID Ph.D. Lecturer

Politehnica University, Bucharest

Abstract. Forex market is a different than any other market based on the transactions with stock, certificates, bonds etc., being for some times bigger than all that markets together. On this market the benefits and the risks can be extremely great. In Romania, Forex market is in the pioneer period and the investments made be by precaution and before we make an investment is necessary to know as well as we can this type of market.

The paper tries to show why is profitable this type of market in the Romanian market, what kind of goods we can be transacted and what kind of people can operate on the Forex market in Romania, as well as the tentative to make a market analyze.

Kew words: Forex market; benefits; risks; market analysis.


The foreign exchange market, also called ‘Forex’, is the largest financial market in

the world, with a turnover of circa 1.2 trillion USD. It is quite impossible to define this market in a physical way, since it represents an operation in a global network of banks, corporations and persons that are exchanging currencies. Forex is a market that functions 24 hours a day, traveling through all the hour zones in the main financial cities. The Forex market does not have a central structure, but diverse dealers connect the sellers with the buyers, independently operating from each other, thus comes the harsh competition among the dealers that leads to the ever increasing quality of the services.

The currencies market means the simultaneous transaction by buying a currency and selling another, these items being in a incessant parity change – and they are always operated in pairs – for example, EURO/USD or USD/Yen. The FX transactions are not centralized in a stock institution, as there are the commodities market or futures, since this market is considered to be ‘over the counter’ (OTC), i.e. after sight, or a Interbank market, so that the transactions are performed between two parties over the phone or in an electronic form. The investors may reply to a currency fluctuation caused by economic, social, political events upon its occurrence (day/night), unlike the other financial markets.

The FX market is also called the ‘intra-banking exchange market’ due to the fact the in the past, it used to be dominated by the banks, including the central banks, commercial and the investment ones. However, the percentage of the participants’ increases rapidly and now is incorporating great multinational companies, global financial managers, authorized dealers, international financial brokers, titles traders (shares and bonds) and private operators/speculators.


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56

The most transactioned currencies are the ones in the countries that have stable governments, internationally recognized banks and low inflation. Currently, over 85% of the daily transactions include the main currencies: American dollar, USD, Japanese yen JPY, Euro EUR, Pound sterling GBP, Swiss franc CHF, Canadian dollar CAD and the Australian dollar AUD. Besides the fact that there are transactioned on Forex a small number of currencies, that allows a bigger strength of concentration on the operator side and, automatically, a greater risk from this point of view. And all this while the exchange market transacts thousand of various shares, that makes it more difficult to opt for one of them.

The FOREX transactions require a minimum deposit of USD 250, and the clients may perform transactions with a margin of up to 200 to 1 as leverage effect, which means that the investors may perform such operations of USD 10,000 with a necessary initial margin of circa USD 60. During the stock exchange shares transactions, there will be required, generally, the deposit of the entire amount necessary for buying these shares.

On the Forex market, there is only a small percentage of the effective value that needs to be deposited prior opening a position, which percentage is called a margin. This is not an effective payment, but more like a possible loss insurance coverage. A margin of 1% signifies the purchase of a USD 100,000 contract with only USD 1,000, so the client will have to have at least USD 1,000 in his account in order to be able to perform this operation. This advantage considerably increases the operation risk at Forex.

In the trade language, a long position is the case when a businessman buys foreign currency at a price with the purpose to resell it at a higher price, thus the investor benefiting from a surging market. A short position is whenever a businessman sells a currency, anticipating its depreciation, and thus the investor benefits from a decreasing market. In spite of this, it is well to remember that each FX position requires an investor to have a long position and another one with a short position.

The market circumstances dictate the daily transactions activity. As a reference, the investor from small to medium may transact up to 1 times a day. Circa 80% of the Forex transactions last for 7 days or less, while more than 40% last for less than 2 days. As a general rule, a position is kept open until the occurrence of any of the below events:

- achieving of the profit scoring as a follow-up of a position; - start of the specific ‘stop loss’ order. An important characteristic for the Forex transactions is the ‘trading on margin’,

which signifies that there may be transacted values higher than there exist in an account open by a person. This will show in the correspondence value (parity) that will enable to perform operations depending on host much there is in that respective account.

A widely encountered value in the USA is 1:50, but there are values such as 1:100, 1:200 or even more (1:500). For example, if there are USD 200 in the Forex transaction account, and the company or the Forex transaction application in discussion offers a transaction rate of 1:50, it is very likely to sell or buy around USD 10,000 in the Forex market, and the amounts derived from the fluctuation of this number will be gained or lost. The application denies the access to that USD 10,000, in other words this money may not be withdrawn or accessed, but it represents a virtual transaction performed by the participant and guaranteed by the USD 200 in his account.

Any Forex transaction involves two currencies: one that sells and the other one that is bought. Normally, it is not mandatory to transact currency in the account – i.e. if there are USD 200 in the account, there may be opened a transaction/position that presupposes the acquisition of pound sterling with euro (as long as the losses from this transaction may be borne by the USD 200 in the account). Consequently, the gains and losses materialize very quickly depending on the rate evolution of the two chosen currencies,


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57

due to the possibility of transacting bigger amounts that the ones in the account. Once a transaction for a much higher amount of a certain currency has been placed, this will bring benefits or losses depending on the rate exchange between the two currencies.

The investment on the international exchange market is not a job to require a daily attendance and 8 hours of work. Of course, there are people connected permanently to the exchange mechanisms, for which the investments replaced the employment place, but also there are busy people who cannot invest too much time in analyzing the currency pairs and following the prices evolution. For the latter, the investment needs to be simple, clear and efficient.

This market does not charge commissions, besides the one paid to the broker, represented by the difference between the sale/purchase price of the currency pair (similarly with the exchange offices).

The exchange market has expressed restrictions as far as the short sale is concerned, which are inexistent in the Forex market. That means profit both upon price increase or decrease. If a currency of the pair is being bought cheaply to sell for a high price, then the other currency can be sold expensively to buy cheaply.

The exchange market is easily influenced by the massive shares acquisition by certain participants in this market. At Forex, these maneuvers are less efficient due to the daily transaction volume, unprecedented liquidity and anonymity of most participants.

Many times, the shares of a company are influenced by the statements of various analysts who recommend certain strategies. At Forex, the analysts do not hold any powers because of the ‘globalization’ of this market, but they limit themselves to analyzing the data. At the stock exchange market, there are transitioned shares belonging to a company, but at Forex, it is about the currency of a nation, directly related to offer and demand. From this point of view, it is easier to evaluate the overall macro-economic factors that characterize an economic system.

A fundamental analysis is a key point in the currencies being transitioned, the health condition of a nation’s economy, and thus determining the periods of appreciation or depreciation of the national currency. For Foresx, are of utmost importance the reports that regard the main economic powers in three continents. Generally, the American dollar reacts the most strongly to the macro-economic data. Monthly, there are published statistics regarding the unemployment rate for the previous month, variations in the hourly wage, and a high percentage in the ‘Unemployment Report’ usually triggers a depreciation of the respective country’s currency.

A high intra-banking interest rate in a certain country makes more attractive the deposits in that currency, while a decrease of such interests leads the investors to other opportunities. The surging inflation is the main cause for the interest rate augmentation. Other important factors refer to the consumer trust, immobile sales, household consumption, trust or lack of it in the business world, price variations for essential goods, etc. All these reports should be looked from an overall view, since there are situations that occur when the market decides to omit certain data. The oil price is another decisive factor in the exchange rates evolution.

Besides these macro-economic factors, the market reacts to social and political events. For example, an unbalanced political life of a nation does not help its currency at all and slows down all the economic reforms.

The technical analysis is complementary to the fundamental analysis. Taking into consideration that the exchange rates evolution is expressed in charts, mathematical probability formulae, this analysis is trying to foresee the future movements, based on the present ones. The technical analysis cannot and will not give any exact solutions, but possible scenarios.


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Undoubtedly, within the limits of an analysis, there should be counted the indicators that cover various market aspects. Also, prior the indicators implementation, an operator should decide if to work on a daily basis (a position opens and liquidates the same day) or on a longer period of time, since the short term probabilities may not coincide with the long term ones.

The transitioned products in this market are: transactions on the Forex international stock exchange market, investments on the international stock exchange market (oil, gold); stock market investments; guaranteed accounts; insurance opportunities/hedging.

Similar with a lot of investments, the international currency exchange may come along with a high risk and may not appropriate for all the investors. In fact, the investor can lose all the initial investments and be responsible for extra losses. That is why one should understand the risk associated to this product so that the final investment decision is not a faulty one, as well as the language of the currency markets before accessing them.

Even if the exchange trading is, by inheritance, governmental (the central banks) and institutional (commercial and investment banks), the currency exchange market is the activity area of the non-banking international corporations, of funds, individual investors and of speculators. Anyway, the technological developments, such as the internet, made it possible for the private investors to monitor the currency markets and transact by middlemen.

The market advanced so much that it has reached a point when the ‘interbank’ term represents any person who is ready to buy or sell currency. There could be two people or any person that wishes to trade euro for dollars. There has been noticed, anyway, the most brokers and banks use centralized systems that ensure the quotation accurateness.

The main feature of the oil and old is their high level of standardization. Irrespective of their producer, the merchandise is identified by means of some characteristics of physic-chemical nature, which determine their quality. Thus, the products will be classified in more quality categories, and the price will be settled correspondingly. Due to that high standardization level, the lots in the same product that belong to the same quality category are inter-changeable within the merchandise international stock market.

The top characteristic of the guaranteed accounts is represented by the capital insurance irrespective of the stock market risks that is being transitioned through. The yearly profitability derived from the wholly guaranteed accounts is between 42.3% and 54.2%, and the one derived from the individually guaranteed accounts is between the minim of 30.8% and max. 84.9%. The funds placed into a guaranteed account are transitioned at the Forex market or at the USA Stock Exchange.

Among the international financial institutions that operate in Forex is MG Financial Group, which is situated as a leader in the Forex broker-companies list. MG Financial Group was founded in 1992, and currently it is one of the oldest and respectable companies in the field. Pioneer of the online operation service since 1997, MG has constantly improved the operation platforms, offering today quotations and graphs in real time. The institution with which MG Financial Group operates for depositing its clients’ funds is JP Morgan Chase Manhattan Bank, a second place as size in the USA.

On the internet, there are a lot of companies that offer access to the Forex market and many of them include free testing sections or at a low price for the Forex transaction applications. Thus, there can be opened a test account and practice the transaction abilities in this market. Also, there are a lot of websites of currency rates analyses, of their tendencies - they present relevant articles in the politic-banking area - and analyses and forecast on currency tendencies. In spite of this, the Forex transactions are very risky.


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On the Romanian market, AsesoriaForex cooperates with MG Financial Group, offering consultancy services for opening a real operation account for the Forex market and Introducing Broker services for the people who, already trained, wish to handle the personal investment themselves or by means of a AsesoriaForex operator or from one outside.

AsesoriaForex addresses to all the people interested in transactioning on the Forex international stock exchange, which currently operates real or demonstrative accounts, and do not have the time or the experience to carefully study the market. Through its services, this company offers the possibility to speculate based on the market fluctuations in order to make profits.

The equipment available and at our disposal takes into consideration the technical and fundamental elements that will trigger the appreciation or depreciation of the currency pair quotation, but with a very rigorous strategy of risk monitoring. The risk/profit ratio is of 1:2. The equipment is open to the ones interested, by email or instant messenger and corresponds mainly to the Europe and USA sessions. The signals are for the following pairs: EUR/USD, GBP/USD, USD/CHF and more rarely, for USD/JPY.

AsesoriaForex will never make unrealistic promises regarding the number of points generated on a month, since this promise does not correspond to its market strategy, which would be exposure to an unlimited risk. Its central objectives are the accomplishment of a constant profit and minimum losses. Some months are better that other, so the gained or lost amounts will vary.

It is recommended that the testing of any service of FX signals/equipment be done by means of a demonstrative account, in order to see, first of all, if it fits the personal operation style of each customer. The previous performance is not a guarantee for the future results.

Most Forex services companies in Romania intermediates the relation of the investor with the outside broker, with the role of ‘introducing broker, i.e the initiation and counseling for starting the investment. On his turn, the foreign broker should have a relation with a custodian bank, the one the client is sending his money to, with a clearing bank, which is the one that operates the transaction at Forex, for example.

WBS Holding Ltd is the only Forex services company in Romania that offers personal transaction platform and, implicitly, the direct opening of an account for it. Anyway, the investor should transfer his money outside the country – in this case, Banca Della Swizzera Italiana. From here, depending on the market being accessed, the money goes to Lloyd’s (London) for the difference contract and Forex, or to Citygroup (New York) for the other derived products.

The Forex market has been off limit for the small investors due to the funds necessary to access it. The internet development enabled the opening of the online operation platforms and, automatically, lead to reduction of the transaction costs. Further, the access platforms have reduced, and today it is possible to open a real account using only a few hundred dollars. But what has been constant, since day one until present, is the risk associated with the Forex transactions.


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Bibliography Ito, T., Lions, R.K., Melvin, M.T., “Is there private information in the FX market? The

Tokyo experiment”, Journal of Finance, vol. 53, nr. 3, 1998 Moldovan, L., „Piata valutara externa (forex) – Motoarele economiei americane îşi reduc

turaţia”, Capital, 28.04.2005 Orjanu, Rodica, “Piaţa FOREX, alternativă la bursele externe”, Săptămâna financiară,

nr.105/2007 http://forexromania.asesoriaforex.com www.forex-romania.ro www.bursaforex.ro www.ozforex.com www.mgforex.com


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ETHICAL ISSUES IN MARKETING REGARDING THE INTEGRATION OF ROMANIA

IN THE ECONOMICAL AND SOCIAL STRUCTURES OF EUROPEAN UNION

Mirela STOIAN

Ph. D. Senior Lecturer Anca Elena RĂDULESCU

Ph. D. Candidate Academy of Economic Studies, Bucharest

Abstract. An ethical issue is an identifiable situation or opportunity requiring an individual or organisation to choose between actions that must be evaluated as right or wrong, ethical or unethical. Product – related ethical issues generally arise when marketers fail to disclose the risks associated with a product, or information regarding the function, value or use of a product. In pricing, common ethical issues are price fixing or failure to disclose the full price of a purchase. The emotional and subjective nature of price creates many situations in which misunderstanding between the seller and buyer cause ethical problems. Ethical issues in distribution involve relationships among producers and intermediaries. Promotion can create ethical issues in a variety of ways, among them false or misleading advertising and manipulative or deceptive sales promotions, tactics and publicity.

Key words: marketing ethics; product; price; distribution; promotion. REL Classification: 14 G

The inadequate operation of the instruments belonging to the marketing mix often leads to unethical practices, such as: the elaboration of products for false needs; miscorrelations as regards the quality/ price ratio, which leads to the market appearance of merchandise with overdrawn prices; the loss of origin of the merchandise, as a result of the complex chain of mediators used in the distribution channel; false and/ or groundless information released into the media, false publicity, inadequate invocation of certain “taboo” stimuli for an audience belonging to a certain groups of people, religion, region, etc. Marketing ethics:

• brings together the problems of the norms to be fulfilled and of the values to be achieved within the performance of all the actions of the partners on the market, so that such actions are performed within a moral environment;

• also takes into consideration the claims (requirements) of the social groups aimed by the flows of the offer of goods, services and ideas, on short, medium and long term;


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62

• came to life during the post-war period, due to the debates regarding the social responsibility of the company(1) in its relations with the suppliers and clients;

• is embedded in the larger field of business ethics. (Danciu, 2001, pp. 507-517)

Typical ethical issues related to the marketing mix Table 1

Marketing Mix Elements Typical Ethical Issues Product Covering up defects in products that could cause

harm to a consumer. Price Indicating that an advertised sale price is a

reduction below the regular list price when, in fact is not the case.

Distribution The Internethas facilitated the distribution of counterfeit products.

Promotion Deceptive advertising. Each market has its own system of values, which must be observed. Two problems

appear from the moral point of view: the effect of the cultural differences on the acceptability of the marketing practices; the ethical problems generated by the marketing activity.

As regards culture, several dilemmas (question marks) appear: • there are different, but acceptable cultural standards (e.g. the promotion system of

the employees depends on: merits, experience, social status etc.); • the marketing practices are not accepted from the ethical point of view in the

mother country, by they are accepted and perceived as moral on the target market (e.g. the attitude towards alcohol, drugs, standards regarding the dress code etc.);

• there is no moral conflict, but the different circumstances lead to the appearance of alternative points of view as to what is acceptable or not in practice (e.g. the standards regarding the safety in mining, pollution etc.).

The most important ethical problems generated by the marketing activity are: ⇒ the destructive influence on the image of certain organizations due to several

illegal actions or any deceptions provoked to the public/ clients. E.g. Johnson and Johnson withdrew the TYLENOL medicine from the market (after 7 deaths) (losses of 100 millions USD); PERRIER withdrew all bottles of water, from every market (traces of benzene were found in Canada in 1990) (losses of 140 million USD);

⇒ practices regarding the product. E.g. Tobacco. The companies sell matured products outside the borders (even deteriorated products in the country of origin);

⇒ counterfeit practices of the products(2). The annual losses due to counterfeits amount to billions of dollars.

The most important counterfeit prevention and fighting strategies: lobby activities at political and administrative level (legislation, sanctions, WTO code); counterfeit fighting (information programs for the identification of fakes, special labeling systems, offering of rewards to those who denounce fakes); product development so that it is one step ahead of the forgers (expensive strategy, sometimes inefficient); collaboration with the forgers (when the costs are smaller).

⇒ the promotion of products based on ethical and philosophical differences;


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⇒ marketing practices of certain organizations that can provoke damages to other organizations: taking over of rival companies; obstacles at the market entry; unfair competition;

⇒ deceiving marketing practices: large packages (content exaggeration); promotion (performance exaggeration); prices (fictitious catalogue prices, offering “free” additional products at the purchase of certain products);

⇒ cultural pollution: messages which stimulate the desires of fast enrichment, power, fast access to the social ladder;

⇒ grey marketing: the import and sale of products based on the price differences due to the exchange rate, local taxes, different market costs;

⇒ dumping. (Dibb Sally, Simkin Lyndon, Pride William, Ferrell O.C., 2005, pp. 795-798)

Factors that influence the ethical decision making process are: individual factors (when people need to resolve ethical conflicts in their lives, they often base their decisions on their own values and principles of right or wrong); organizational relationships (ethical choices in marketing are most often made jointly, in work groups and committees, or in conversations and discussions with co-workwers); opportunity (a favourable set of conditions that limit barriers or provide rewards).

Figure 1. Factors that influence the ethical decision

The regulation of the marketing practices in view of avoiding ethical conflicts requires: governmental policies (legislation: antitrust laws, laws for the protection of consumers, for intellectual protection and for corruption fighting); ethical codes for the markets (the same norms and standards for all the markets); ethical codes adopted by the organizations (for the employees, for example).

Notes

(1) There are also specialists (Milton Friedman) who consider that the sole responsibility of the companies is to earn money. In case they “try” other responsibilities, they only do more damage than good: “the social responsibility of business is to increase its profit”.

(2) Forges products must not be mistaken for the “gray markets”, which offer original products by means of unauthorized channels of distribution.

ETHICAL DECISIONS

Individual factors

Organisational relationships

Opportunity


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Bibliography

Crăciun Dan, Morar Vasile, Macoviciuc Vasile, 2005 „Business Etics”, Publishing House

Paideia, Bucureşti Danciu Victor, 2001, „International Marketing”, Publishing House Economica, Bucureşti Dibb Sally, Simkin Lyndon, Pride William, Ferrell O.C., 2005, „Marketing. Concepts and

Strategies”, Houghton Mifflin Company, Boston, U.S.A. Kotler Philip, Roberto Ned, Lee Nancy, 2002, „Social Marketing. Improving the Quality

Life”. Second edition, SAGE Publication, California, USA


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COMPARATIVE APPROACHES REGARDING FISCAL SYSTEMS IN EUROPEAN UNION

Iulian BRAŞOVEANU Ph.D. Lecturer

Laura Obreja BRAŞOVEANU Ph.D. Lecturer

Cristian PĂUN Ph.D. Lecturer

Academy of Economic Studies, Bucharest Abstract. The role and the dimension of the state involvement in the economy

represent the most important topic debated on by all the economic schools. To achieve this target, the state can use as an instrument the fiscal policy. For Romania, the present time brings forth new challenges - the joining to the European Union. The fiscal policy has to be achieved so as to support the nominal and real convergence, in the same time being flexible enough to make easier some inner and outer shocks in the moment of joining. We presented the main features of the European Union fiscal systems, for the fiscal revenues: corporate on income tax, personal income tax, social security contributions, value added tax, excise tax. The analysis was realized for 1995-2007.

Key words: taxation; direct taxation; indirect taxation; social security contributions;

personal income tax; corporate income tax; value added tax; excise tax. REL Classification: 20I, 8K

Introduction At first January 2007 Romania became a member state of European Union. Fiscal

policy is a main component of European integration. In case of indirect taxation, Romania must respect the conditions of integration established by the European directive. In the case of direct taxation there are not such settlements.

We will present in this article the main features of the European Union fiscal systems, for the fiscal revenues, using data for 1995-2007 periods. We analysed corporate income tax, personal income tax, value added tax, excise tax and social security contributions.

1. Corporate income tax The trend of this tax, in 1995-2007 periods, in EU-27, was to reduce considerable the

tax rate. Business climate it was improved by this policy, in all EU-27 member states. Even in Finland, where the tax rate in 2007 is 1 pp (percent point) higher then 1995, in the last three years the tax rate was reduced with 3 pp.

The only country member of EU-27 who kept tax rate constant in 1995-2007 was Sweden, and the rate was 28%. We can mention here a similar evolution in Norway (the rate


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was also 28%). The highest corporate income tax rates exist in Deutschland an Italy, also in 1995 and 2007, even the trend for this period was the decrease rates: in Deutschland from 56,8% to 38,7%, and in Italy from 52,2% to 37,3%.

The most important tax rate reduction was in Bulgaria (30 pp, from 40% to 10%), in Ireland (27,5 pp, from 40% to 12,5%) and in Romania (22 pp, from 38% to 16%). Our country is in the first three states on this chapter of analysis.

1,000,000,00

2,00-2,20-

2,50-3,00-

4,00-6,00-6,20-

9,00-9,50-

10,00-11,00-

11,30-13,10-

15,00-15,00-15,00-

17,00-18,10-

21,00-21,00-

22,00-27,50-

30,00-

1,10-

FIMTSEHUSI

FRESUKEEDKBEATNLLVLTLUPTELIT

CYCZDEPLSKROIE

BG

Data sources: European Commission.

Figure 1. The corporate income tax rate evolution in 1995-2007, in EU-27 member states Using values of corporate income tax rate from 2007, we realised the following figure:


Figure 2. The adjusted corporate income tax rate applied in 2007, EU-27


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Romania is one of the most attractive countries from EU-27, with a low tax rate at this moment. Bulgaria and Cyprus have the lowest on corporate income tax rate: 10%. These countries are followed by Ireland with 12,5%, Latvia with 15% (10 pp lowest then the personal income tax rate) and Romania, with 16%.

From EU member states which apply a unique rate, we observed that Slovakia, Estonia and Romania have the same rate for corporate income and personal income. In the case of Lithuania and Latvia, the corporate income tax rate is reduced comparatively with the personal income tax rate with 9 and 10 pp.

The values of the tax rate are similar with de EU arithmetic average (24,5% for EU-27 and 25,5% for EU-25) in the following countries: Slovenia, Czech Republic, Greece, Austria, Netherlands, Finland and Portugal.

Denmark, Sweden and Norway have the same corporate income tax rate, 28%, value similar with the EUR 13 arithmetic average (28,5%). Luxembourg practices a 29,6% rate, United Kingdom 30% rate, and Spain, Belgium, France, Malta have tax rate between 32,5% and 35%.

The evolutions of arithmetic average corporate income tax rates for EU 27 and EU-25 was similar in 1995-2007 periods: decreasing from 35% to 25%. The arithmetic average for EUR 13 member states was, constantly, with 3 pp higher then the arithmetic averages specified above.

2. Personal income tax Among the EU-27 member states we can identify two modalities to set the fiscal

revenues: with gradual tax rates or single tax rate. We presented in our analysis the tax rates for wages. For others categories of personal income (income for dividends, interests, real estate, legacy, donations) there are specific tax rates.

The highest personal income tax rates exist in Denmark (59%), where the personal income tax revenues are the highest among EU-27 member states. Sweden has the second rate and Finland the fourth maximum personal income tax rate. The fourth Nordic state, Norway, has different settlements of this tax, at 10 pp distance from Finland. Tax rates from 50 % minimum exist also in Belgium, Austria, Slovenia and Netherlands.


Figure 3. Personal income tax rate (maximum) applied

at 1 January 2007 by EU member states:


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The majority of EU-27 member states (17) have a personal income tax rate higher than 38,95% and only 7 states have a tax rate lower than 30%. In Romania, the evolution of personal income tax rate was from average tax rate of EU to the minimal tax rate among all 27 member states.

We presented comparatively approaches to set the personal income tax (code ESA 95: d51a) in EU-27 members states, in accordance with 2007 European Commission data.

Personal income single tax rate is set to realise simplicity, transparency and efficiency in collecting fiscal revenues. Single tax rate was introduced for the first time in 1994 in Estonia (26%) and Lithuania (33%). Next countries were Latvia in 1995 with 25%, Russia and Serbia in 2001 with 13% and, respectively 14%. This taxation level was applied also in 2004 by Ukraine (13%) and Slovakia (19%) and in 2005 by Romania (16%) and Georgia (12%).

We can notice that Romania it is the last country that adopted this taxation policy and the country with the minimum taxation level is Georgia.

In Slovakia the single taxation level in 2005 is maintained today to 19% level, in Latvia is 25%, Estonia reduced this tax to 22% in 2007, proposing a reduction to 20% in 2009. Lithuania this tax was reduced to 27% in 2006, in 2008 being estimated a new correction to 24%.The value of collected taxes in 2005 is placed between 2.76% and 5.77% from GDP, these countries applying a reduced fiscal regime regarding this tax.

The Northern European Countries have the highest level for this particular tax from the countries that apply a progressive taxation system. In Denmark the high level of taxation applied to the individual incomes has an important contribution to the pension system. In Finland, in 2007 were applied 5 different taxation levels, the minimum being 9% and the maximum 50%. The maximum level is applied to an income higher than 86400 Euros per year. The mean value is 24%. The incomes lower than 12.400 Euros are exempted from taxation. For Northern European Countries we can observe that this tax has an average weight in GDP of 15% and an average weight in total fiscal incomes of 33.33%. If we are looking to the evolution between 2001 and 2005 we can see that the trend for this tax is to be reduced even in Northern European Countries.

Other countries that apply a high taxation level for individual incomes are Belgium, United Kingdom, Italy and France. Countries like Austria, Luxembourg, Spain, Netherlands, Malta, Hungary, Slovenia and Portugal apply moderate taxation level for individual incomes and countries like Greece, Czech Republic, Poland, Bulgaria and Cyprus apply a reduce level for this kind of tax. Romania is the country with the most reduced level of taxation for individual income and for the weight of this tax into GDP (2.4% in 2005 and 2.9% in 2006).

3. Value Added Tax European VAT system was created and modified though the EU Directives voted by

European Council and Parliament. Starting with 1977, European Countries decided to uniform the taxation basis and VAT taxation level. Some European Countries negotiated some exceptions from VAT payments and different VAT levels for few local regions and territories.

The standard value for this tax was established to a minimum level of 15%, the member states having the possibility to increase this tax until a maximum level of 25%. It is accepted a lower VAT level (under 5%) for few strategic goods (especially food). As exception too, in United Kingdom there is a zero VAT level, but this situation will be modified soon, the minimum accepted level for VAT (for exceptional situations) being established to 5%.


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In countries like Ireland (4.8%), Greece (4.5%), Spain (4%), Italy (4%), Luxemburg (3%), Poland (3%), France (2.1%) it is applied a reduced level for VAT. Another particularity among European Countries is the parking quote that is a special VAT applied for particular goods in five member states. This parking quote is 12% in Belgium, Austria, Luxemburg and Portugal and 13.5% for Ireland at this moment.

The use of differentiated VAT’s it is motivated by the existence of some goods and services considered very important for us. The idea is to apply a maximum VAT for luxury goods and to apply a minimum VAT for strictly necessary goods. In this last category are included: basic food products, medicines, cloths, scholar books. This approach is not respected by all European Countries; the final decision belongs to the local authorities. Romania does not respect this principle too by not applying a lower tax to this kind of goods.

VAT quotes applied at 1 may 2007 by EU country states

Table 1

Members Symbol Very reduced VAT Reduced VAT

Standard VAT Parking quote

Belgium BE - 6 21 12 Bulgaria BG 7 20 Czech Republic CZ - 5 19 - Denmark DK - - 25 - Germany DE - 7 19 - Estonia EE - 5 18 - Greece EL 4,5 9 19 - Spain ES 4 7 16 - France FR 2,1 5,5 19,6 - Ireland IE 4,8 13,5 21 13,5 Italy IT 4 10 20 Cyprus CY - 5 / 8 15 - Latvia LV - 5 18 - Lithuania LT - 5 / 9 18 - Luxemburg LU 3 6 15 12 Hungary HU - 5 20 - Malta MT - 5 18 - Netherlands NL - 6 19 - Austria AT - 10 20 12 Poland PL 3 7 22 - Portugal PT - 5 / 12 21 12 Romania RO 9 19 Slovenia SI - 8,5 20 - Slovakia SK - 10 19 - Finland FI - 8 / 17 22 - Sweden SE - 6 / 12 25 - United Kingdom UK - 5 17,5 -

Data source: EU Commission.


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Maximum VAT level is in Denmark and Sweden (25%). On the second place are Finland and Poland (22%). Romania is placed in the middle group with a VAT of 19%, on the position 14-19 from this hierarchy. The most reduces VAT level is in Spain (standard quote is 16%), Cyprus and Luxemburg (applying minimum quote of 15%) imposed by the Commission directives.

Denmark is the only member state without minimum VAT level. Minimum VAT level is 5% (as EU Commission recommended) in Czech Republic, Estonia, Cyprus, Latvia, Lithuania, Hungary, Malta, Portugal and United Kingdom. Romania is placed in the group of countries with high minimum VAT level (9%) on the places 21 – 22, on the same position with Greece, having in front of it Italy, Austria and Slovakia (10%) and Ireland (13.5%). We can observe that in case of Ireland minimum VAT level is equal now with parking quote, so it can be unified into a single minimum VAT level.

4. Harmonized excises In the field of excises, the harmonization indicates the products in case of which it is

apply the minimum level of taxation for specific products, general regime, the stoking, circulation and control of products submitted to these taxes. Usually, the payment of excises it is realized by the country where the goods are consumed. In the following figure it is presented the level for few harmonized excises for our country and other EU-27 countries, for a comparative analysis.

Data source: EU Commission. Figure 4. Excises for pure ethylic pure alcohol in EU member states at 1 July 2007

Minimum excise required by EU is 550 Euro/1 hectoliter of pure alcohol. Romania

has an excise of 750 Euro/1 hectoliter of pure alcohol and will be maintained unmodified until 2001. So, Romania does not apply the minimum taxation level in this case, applying a tax 50% higher than required minimum level. Other countries that apply a very high level for this kind of tax are: Sweden (5374 Euro/hl), Ireland (3925 Euro/hl), United Kingdom (2885 Euro/hl) and Finland (2825 Euro/hl). The most reduced values for this tax is in Bulgaria (562 Euro/hl) and Cyprus (607 Euro/hl).


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The minimum excise level for intermediate products obtained from alcohol is 45 Euro/hl of product. Romania applies a tax of 51.08 Euros/hl of processed from alcohol product and this tax will remain unmodified until 2010. Romania does not apply required minimum level for this tax, the current level being higher with 6.08 Euros/hl (13% above required minimum level). The countries with the highest level of this tax are Sweden (484.05 Euros/hl), Finland (424 Euros/hl), Ireland (396.12 Euros/hl) and United Kingdom (350.06 Euros/hl). The most reduced levels are registered in Greece (45 Euros/hl) and Cyprus (45.6 Euros/hl).

For beer and wines EU does not indicate a minimum level for this kind of tax but Ireland and United Kingdom apply a high taxation level for this kind of products comparing with the others European Countries.

Data source: EU Commission. Figure 5. Excises applied for unleaded gas in EU countries at 1 of July 2007

Excises are expressed in Euros, for each 1000 liters. The minimum imposed excuse is

of 359 Euros for each 1000 liters. In Romania’s case, this excise is of 327.29 Euro for each 1000 liters, and it is supposed to reach 335.72 Euros by 2009, and 348.04 Euros by 2010. If this be the case, our country imposes a tax lower than the demanded one.

The largest excises are registered in Great Britain, of 760 Euros for each 1000 liters, in Holland, 678.79 Euros and in Germany, 670 Euros. The smallest value for this excise is registered in Lithuania, of 287.01 and Estonia, of 287.54.

The minimum excise for gasoline, imposed by EU, is of 302 Euros for each 1000 liters. In Romania, this excise is of 259.91 Euros for each 1000 liters, and it is supposed to reach a value of 293.22 by 2010. If this be the case, our country imposes a excise lower than the minimum imposed.

The largest excise is registered in Great Britain, of 806.1 Euros for each 1000 liters an in Germany, of 485.7 Euros. The lowest value for this excise is registered in Lithuania, of 245.22 Euros and in Estonia, of 245.42 Euros.

The values for the excise in our country, which in 2007 have been under the minimum demanded by EU, can be explained by the excise, for the states that joined EU after 2004. In order to avoid an increase in inflation and a decrease in purchasing power of taxpayers through a shock therapy, these excises have been gradually increased, according to a calendar agreed upon with the Commission.


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For cigarettes’ excise we have presented in Figure 6 the weight of the excise applied to the final selling price of individual goods. The lower part of each weigh is represented by the specific excise and the upper part by the percentage excise.

The largest weigh in the individual selling price is registered in Spain, France, Hungary and Portugal. Our country is among the countries with a low weigh, although differences are small, all states having a weigh between 52 and 62. Romania is among the countries with a high weigh of the specific excise of the final selling price (approximately 40%). Countries with the lowest weigh in the final price are Greece and Italy (approximately 3%)

Data source: EU Commission.

Figure 6. Excises for cigarettes in EU member states at 1 July 2007 We can conclude from the previous data that our country is on a positive trend

according to the level of excise, but is generally situated in the lower part of the EU states according to the size of the excise. This is normal if we consider the low purchasing power of the Romanian tax payers. In fact, excises are an integration price that has to be paid. The gradual method is used for increasing these excises.

5. Compulsory social contributions For this fiscal group, European integration does not consider harmonization or certain

minimum values. Thus, there is a myriad of possibilities of placing EU-27 taxpayers. We continue by presenting some of the compulsory social contributions for EU member states.

In Belgium, the quotas for the compulsory social contributions are: 35% for the employers and 13% for the employees. The total quota is 48%. In the Check Republic, employers pay 35%, whereas employees pay 12.5%. The total quota is 47.5%. These contributions cover also health and unemployment. In Austria, the quotas are 21% for the employers and 17% for the employees. The total quota is 38%.

In Latvia, the quotas for the compulsory social contributions are 24.09%for the employers and 9% for the employees. The total quota has decreased in 2001 from 35% to 33.09%. In Lithuania, the quotas are: 31% for the employers and 3% for the employees. The total quota is 34%. In Estonia, the contributions are 33% for the employers (13% for health and 20% for pensions: 16% for the main system and 4% for the secondary system) and 2%


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for the employees for the secondary system. Total quota is 37%. The unemployment has been introduced in 2002: 1% for employers and 0.5% for employees. As of 2006 these contributions are 0.6% for employers and 0.3 for employees.

In Bulgaria, the total quota for these contributions has decreased from 35.7% in 2000 to 29.5% in 2006. The proportion employer-employee is 65:35. In 2010 this proportion is supposed to be 50:50. In Cyprus, the quotas are: 10% for employers and 4% for employees. The total quota for this country is 14%.

In Slovakia, compulsory social contributions are owed in the following quotas: - for pensions, the employer pays 14% and the employee 14%; the total quota is

28%; of this incomes 9% go toward the secondary pension scheme; - for health social contributions the employer should pay 10% and the employee 4%;

for persons with handicap the employer and employee will pay 4.4%; - for unemployment the employer should pay 0.8% for insurance fund for labor

accidents, 4.75% for reserves fund and 0.25% for guarantees fund. Slovakia has the most complex system, closed to Romanian system. In our country

the quotes significantly decreased but still remained among the highest levels from EU. Final conclusions Following our analysis we noticed that, even the harmonization of fiscal policies is

not compulsory (excepting indirect taxation), our country could be included in a general trend for EU member states of reducing the taxes applied to the profit and incomes. Romania adopted the model of single tax used by Baltic Countries, former soviet countries and Slovakia.

The single tax in Romania has the lowest level from EU member states regarding individual contributors and among the lowest for quotes in case of business sector. Romania is the country with the lowest weight of profit and income taxes in GDP.

The differences between maximum and minimum level for the taxes applied to profits and individual incomes are very high: 28.7 pp in case of profit tax and 43 pp in case of individual incomes tax. The developed countries of EU have the possibility to maintain high levels of direct taxation comparing with other EU countries.

A reduced single tax in case of Single European Market is a good tool to attract higher investments and to make more attractive the business environment. In case of compulsory social contributions, Romania has a very complex system and a one of the highest taxation level for this contributions (even this contributions tends to decrease starting with 2004).

Romania has a VAT level higher than EU mean and the reduced VAT level is placed among the highest three levels from EU. This situation could be a strong alarm signal if we are thinking to the lower purchasing power of contributors and to the fact that this facility is not applied for strictly necessary goods (food, medicines).

In case of excises, Romania applies lower values than EU mean but the value for these excises are estimated to increase in next period due to the harmonization schedule to the minimum level required by European Union.

We concluded that our fiscal system is closed to the Slovakian system: • both countries apply single tax for profits and individual incomes, with a plus of

3pp for Slovakia. In the moment of introduction of single tax in Romania was discussed a level of 19% but political decision was for 16%;

• standard VAT is 19% in both countries, reduced VAT level is 10% in Slovakia and 9% in our country;

• social compulsory contributions from Romania and Slovakia very complex and high comparing to other EU members. Slovakia has a higher level than Romania


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and Slovakia very complex and high comparing to other EU members. Slovakia has a higher level than Romania with 3 pp;

• we can notice strong similarities regarding excises too. Overall looking, Slovakia has a fiscal level higher with only 1.1 than Romania in

2006. In 2006, Romania applies the lowest taxation level from EU countries, Slovakia and Lithuania being placed on the second place together.

Bibliography Braşoveanu, I., „Fiscal policy in Romania in the transition period towards market based

economy”, doctoral thesis, Bucharest, 2007 Official documents from European Commission regarding taxation, 2007 Fiscal Romanian Code


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DETERMINANTS OF ECONOMIC GROWTH AND ROMANIAN COMPETITIVENESS.

AN EMPIRICAL ANALYSIS

Dan CĂTĂNEŢ Candidate Ph. D.

Academy of Economic Studies, Bucharest Alina CĂTĂNEŢ

Candidate Ph. D. Assistant Media University Cătălina RADU

Candidate Ph. D. Assistant Academy of Economic Studies, Bucharest

Abstract. Economic growth rates vary dramatically across countries over long period of

time creating big differences in the standard of leaving of its residents. Using the general framework developed by Barro on a panel date for more than 150 countries with observations computed 5 years, 10 years, 20 years, 40 years period, and annually, during 1961-2000, we found that economic growth is positively correlated with a higher level of health and education, and an increase in: savings, openness of the economy, development of the financial system, capital formation, FDI, and real interest rate. Therewith economic growth is negatively correlated with a higher level of GDP per capita, and an increase in: government consumption, inflation rate, budget deficit, fertility and population growth, unemployment, and current account deficit.

In this framework, the evolution and the perspectives of the Romanian growth determinants is mainly positive, although its competitiveness has to grow in order to overcome the new challenges since we have join European Union, as can be read also in “The Global Competitiveness Report 2007-2008”.

Key words: economic growth; analysis of Romanian growth determinants; evolution and perspectives.

REL Classification: 8E

Determinants of economic growth: a short summary of the literature An important literature has been written on the determinants of economic growth in

the last 20 years. Their analyses have recorded a real success explaining the differences in per capita growth accounted by countries over long periods of time.

Barro (1991)(1), the initiator and developer of this theory, uses as main explanatory variables: the initial level of real per capita GDP, the school enrolment, the political instability, the deviation regarding the parity of power purchasing, the life expectancy at birth and fertility rate. Using a panel consisting in over 100 countries, Barro (1997)(2) found that the hypothesis of


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conditional convergence is valid. The lower is the starting level of real per capita GDP, relative to the long-run or steady state-position, the faster is the growth rate. Economies that have less capital per worker (relative to their long-run capital per worker) tend to have higher rates of return and higher growth rates. The convergence is conditional because it depends on the other determinants of the economic growth. This means for certain levels of the education attainment, health and other variables that reflect national characteristics, policies, and institutions, growth rate rises when the initial level of real per capita GDP is low relative to its long term level. Therewith, for a given starting level of real per capita GDP, the growth rate is enhanced by higher initial schooling and life expectancy, lower fertility, lower government consumption, better maintenance of the rule of law, lower inflation, and improvements in the terms of trade.

The empiric evidences in the literature suggest that economic growth is positively related to: • the starting level of average years of school attainment at the secondary and higher

level - Barro (1991, 1996, 1998, 1999, 2001, 2003), Levine and Renelt (1992), Benhabib and Spiegel (1994), Doppelhofer, Miller, and Sala-i-Martin (2000)

• TFP (total factor productivity) - Sarel (1998), Crafts (1999), Easterly and Levine (2001), Iwata, Khan, and Murao (2002)

• technological progress and technological diffusion - Romer (1986, 1987, and 1990), Lucas (1988), Rebelo (1991), Grossman and Helpman (1991), Gordon (2002)

• investments in research and development - Grossman and Helpman (1991), Aghion and Hewitt (1992), Coe and Helpman (1993), Barro and Sala-i-Martin (1995)

• improvements in the stock of capital - Romer (1986), Lucas (1988), Rebelo (1991) • labor and capital productivity - Bergoeing, Kehoe, Kehoe, and Soto (2002) • saving rate - Levine and Renelt (1992), Howitt and Aghion (1998), Bernanke and

Gurkaynak (2001), Aghion, Comin, and Howitt (2006) • initial level of life expectancy at birth - Barro (1996, 2003), Doppelhofer, Miller,

and Sala-i-Martin (2000) • investment rates - Barro (1989, 2003), DeLong and Summers (1991), Mankiw,

Romer, and Weil (1992), Levine and Renelt (1992), Mankiw, Phelps, and Romer (1995), Hugo (1999), Bernanke and Gurkaynak (2001)

• institutional framework - Knack and Keefer (1994), Dhonte, Bhattacharya, and Yousef (2000)

• macroeconomic stability - Fischer (1993), Easterly and Levine (1997) • better maintenance of the rule of law - Barro (1996, 2003) • investments in infrastructure - Barro (1989), Canning and Fay (1993), Easterly and

Levine (1997) • maintenance of the property rights - Barro (1989) • development of the financial and banking system - King and Levine (1993), Levine

and Zervos (1996), Rajan and Zingales (1998), Demirgüç-Kunt and Maksimovic (1999), Beck, Levine, and Loayza (1999)

• foreign direct investments - Borensztein, De Gregorio, and Lee (1995). Economic growth rates are negatively related to: • the initial level of real per capita GDP - Barro (1991, 1996, 2003) Mankiw, Romer, and

Weil (1992), Levine and Renelt (1992), Doppelhofer, Miller, and Sala-i-Martin (2000) • taxation level - Barro (1989) • government consumption - Barro (1991, 1996, 2003) • market distortions - Barro (1989, 1991, 2003), Fischer (1993), Easterly and Levine (1997) • political instability - Barro (1989, 1991), Mankiw, Phelps, and Romer (1995) • high inflation and inflation fluctuation - De Gregorio (1992, 1993), Barro (1995,

1996, 2003), Esterly and Bruno (1995), Sarel (1996), Easterly and Levine (1997) • fertility rate - Barro (1996, 2003) • budget deficit - Fischer (1993), Easterly and Rebelo (1993), Mankiw and Ball (1995).


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General framework for the growth determinants analysis The general framework for the determinants of the economic growth, developed by

Barro (1996)(3), follows the extension of the neoclassical model, which relates real GDP per capita growth rate (annual %) with two kinds of variables: initial variables and the control or environmental variables. As initial levels of the state variables, we shall be using the stock of physical capital as a logarithm of the initial level of real per capita GDP (PPP current international $ or constant 1995 US$), and the initial level of human capital, in the form of education, expressed by the secondary and tertiary school enrolment (% gross), and in the form of state of health, expresses by the logarithm of life expectancy at birth, total (years). As control variables, which characterize the governmental policies and the economic agents’ decisions, we use in all our regressions the following indicators: general government final consumption expenditure (% of GDP), gross capital formation (% of GDP), fertility rate (total births per woman), population growth (annual %), inflation rates (consumer prices, annual %), budget deficit (overall budget balance, including grants - % of GDP), market capitalization of listed companies (% of GDP), domestic credit provided by banking sector (% of GDP), gross domestic savings (% of GDP), unemployment ( total, % of total labor force), current account balance (% of GDP), foreign direct investment (net inflows, % of GDP), openness of the economy (as sum of exports and imports of goods and services, % of GDP), real interest rate (%), money and quasi money (M2) as % of GDP, and real effective exchange rate (index, 1995 = 100). The availability of data for the initial level of physic and human capital is unsure, especially for the countries situated under the development process, and the way in which an indicator is measured can be different from one country to another. In these conditions, we shall considerate, as Barro did (1995, 1997), that for certain values of the education and health, an increased initial level of GDP per capita reflects a greater stock of physical capital per person (or a larger quantity of natural resources).

We write therefore, as a function, for a country, the growth rate of GDP per capita, for the period t of time as:

( );...; ** hyFDy = , (1) where y* and h* represent the initial conditions, respectively y* is the initial level of GDP per capita, and h* the initial level of human capital (expresses by the secondary school enrolment, the life expectancy at birth, etc.). The omitted variables, denoted by “…”, comprise an array of control and environmental influences. These variables would include preferences for saving and fertility, the government policies with respect to spending, and so on.

In the empirical implementation we use the initial level of per capita GDP from the growth equation from above, under the form log(y*). The negative coefficient of this variable represents the convergence rate. For h* we shall be using the initial level of the secondary or tertiary school enrolment rate and the logarithm of life expectancy at birth as an initial level.

Data and methodology We are using 23 indicators for 167 countries, from World Development Indicators

2002 and World Development Indicators 2007, World Bank. In order to exploit the temporal dimension of the data and to analyze the long term relation between the determinants and the economic growth we shall use panel data with annual, 5 and 10 years, 20 years, and 40 years observations. Thereby, the observations for control variables are computed as average (mean) values of the indicators on 5 years, 10 years, and 20 years periods, during 1961 - 2000. The variables which are representing the initial conditions are computed as observations from the beginning of each period. Economic growth is computed as the annual growth rate of real GDP as a mean for each period of the available data.

In regressions we shall use the maximum number of countries and periods shown by the available information.


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The basic regression is: ε+×γ+×β+α=Δ YX , (2)

where the dependent variable Δ is the real growth of the GDP per capita, X is the matrix of the variables which express the initial conditions and Y is the matrix of the control variables.

In order to study the relation between determinants and the economic growth we shall use the following type of equations:

itiit'itit xy ε+β×+α= , (3)

where i =1, 2,…,N represent the country and t=1,2,…,T, the time period. We use Pooled Least Squares and Feasible GLS (general list square) as econometric methods.

Due to the variable variances of the residuals between countries, we shall use a feasible GLS that assuming the presence of cross-section heteroskedasticity. In order to allow variances within a cross-section to differ across time we shall use White Heteroskedasticity Covariance, which estimate covariances that are robust to general heteroskedasticity. We test the variable variances of the residuals with Bartlett, Levene, and Brown-Forsythe tests.

In the literature Easterly (2000), Kraay and Monokroussos (2000) applied Pooled OLS analyses on panel data, Fischer (1993) and Barro (2003) used three–stage least squares, Levine and Schmukler (2003), Claessens, Klingebiel, Schmukler (2003) worked with FGLS.

In order to use as much as possible data, due to the fact that there are some observations missing at some countries, we worked with unbalanced data in Eviews 4.1.

Results In over 30 regressions (like the one from the table 1) on economic growth, using the

general framework described above we found the following: • initial level of GDP per capita is very significant and robust in all the regression and all

types of computed observations (annual, 5 and 10 years, 20 years, and 40 years periods) and it’s negatively correlated with the economic growth, which confirms the conditional convergence predicted by the Solow – Swan neoclassic economic growth models. Therefore, the convergence for the analyzed countries varies depending on other determinants that are in regressions between –0.9% and –1.8% for the GDP PPP at the purchasing power parity, as can be seen below, in table 1 and 2.

• the initial level of health, expresses by the logarithm of life expectancy at birth is very significant and positively correlated with growth in all the regressions, being a robust determinant of economic growth;

• initial level of the education, expressed especially by the secondary school enrollment and by tertiary has a positive value in regressions and is significant;

• saving is important and has a significant and positive coefficient in different regressions, but its value depend on the others variables used in regressions;

• government consumption is negatively correlated with economic growth, having a signify-cant values, lesser in regressions with observations computed in 20 and 40 years periods;

• inflation is significant and robust, negatively correlated with growth in regressions. It has a low coefficient, which means it has a strong impact only at high levels. In a regression with growth using 40 years average observations it has the biggest R2 from of 0.185501 and a robust negative coefficient (-0.005113) which mean is very important determinant over long periods of time.

• budget deficit has a strong negative impact on economic growth with a big coefficient, as can be seen in the tables 1 and 2;


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• the openness of the economy enter significant, in many growth regression, generally with a positive coefficient;

• fertility and population growth have a negative impact upon economic growth because, as Barro (1996) said, the resources will be directed to increase the natality and create capital for new workers than to enhance output production and per worker capital;

• development of the financial and banking system plays a very important role in an efficient allocations of resources in the economy and is positively correlated with growth through M2 monetary aggregate, domestic credit provided by banking sector, and especially through market capitalization of listed companies in GDP.

• gross capital formation is positively correlated with growth, having a coefficient of 0.127; • foreign direct investments are positively correlated with growth, because investors chose

those economies with favorable business environments and encourage technological transfer; • unemployment is significant negative correlated with growth in many regressions; • real interest rate is positively correlated with growth with a coefficient of 0.030353; • current account balance has also generally a positive coefficient in relation with growth; • real effective exchange rate is positively correlated with growth in some regressions

but its coefficient is very close to 0. Regression on determinants of the economic growth

Table 1 Dependent Variable: GDPCGR? Method: GLS (Cross Section Weights) Sample: 4 8 Included observations: 5 Number of cross-sections used: 123 Total panel (unbalanced) observations: 436 One-step weighting matrix White Heteroskedasticity-Consistent Standard Errors & Covariance Cross sections without valid observations dropped

Variable Coefficient Std. Error t-Statistic Prob. C -24.14189 2.111966 -11.431 0

LNGDPP? -1.638838 0.075816 -21.61599 0 LNLIFEE? 9.390445 0.592673 15.84421 0 SCHOSE? 0.011244 0.002323 4.841229 0 SCHOTE? 0.007651 0.002736 2.79695 0.0054

SAVI? 0.02858 0.006241 4.579593 0 G? -0.044743 0.007113 -6.290493 0

INFL? -0.002056 0.000682 -3.013986 0.0027 BD? -0.108565 0.011716 -9.266129 0

(EXPO?+IMP?) 0.00685 0.000819 8.363528 0 POPGR? -0.240941 0.040206 -5.992599 0

Weighted Statistics R-squared 0.793964 Mean dependent var 2.816884 Adjusted R-squared 0.789117 S.D. dependent var 6.151364 S.E. of regression 2.824832 Sum squared resid 3391.362 F-statistic 163.7751 Durbin-Watson stat 1.908414 Prob(F-statistic) 0

Unweighted Statistics R-squared 0.205704 Mean dependent var 1.527857 Adjusted R-squared 0.187014 S.D. dependent var 3.264068 S.E. of regression 2.94307 Sum squared resid 3681.207 Durbin-Watson stat 1.591038


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Regression on determinants of the economic growth Table 2

Dependent Variable: GDPCGR? Method: GLS (Cross Section Weights) Sample: 4 8 Included observations: 5 Number of cross-sections used: 94 Total panel (unbalanced) observations: 302 One-step weighting matrix White Heteroskedasticity-Consistent Standard Errors & Covariance Cross sections without valid observations dropped

Variable Coefficient Std. Error t-Statistic Prob. C -20.47142 2.268677 -9.023504 0

LNGDPP? -0.924206 0.095567 -9.670808 0 LNLIFEE? 7.360633 0.684115 10.75934 0 SCHOSE? 0.009036 0.002087 4.329817 0

G? -0.054177 0.007347 -7.373924 0 INFL? -0.001929 0.000455 -4.2355 0 BD? -0.103043 0.011448 -9.001083 0

(EXPO?+IMP?) 0.005681 0.000659 8.618753 0 UNEM? -0.051539 0.010257 -5.024746 0

Weighted Statistics R-squared 0.83167 Mean dependent var 4.345779 Adjusted R-squared 0.827073 S.D. dependent var 6.988164 S.E. of regression 2.905989 Sum squared resid 2474.318 F-statistic 180.953 Durbin-Watson stat 2.035221 Prob(F-statistic) 0

Unweighted Statistics R-squared 0.16552 Mean dependent var 1.858468 Adjusted R-squared 0.142736 S.D. dependent var 3.240077 S.E. of regression 2.999941 Sum squared resid 2636.897 Durbin-Watson stat 1.634752

These are estimation outputs in Eviews 4.1. Notations: GDPCGR? is GDP per capita

growth rate (5 years average), C is the common intercept, LNGDPP? is logarithm of the initial level of real per capita GDP PPP (the first of in each 5 years period), LNLIFEE? is logarithm of life expectancy at birth (the first of in each 5 years period or the value from the previous year if the observations is missing for the first year), SCHOSE? is secondary school enrolment (computed as LNLIFEE?), SCHOTE? is tertiary school enrolment (computed as LNLIFEE?), SAVI? is gross domestic savings (5 years average, like the rest of the environmental variables), G? is government consumption, INFL? is inflation rate, BD? is budget deficit, (EXPO?+IMP?) is the openness of the economy, POPGR? is population growth, and UNEM? is unemployment rate. The periods are 1961-1965, 1966-1970, 1971-1975, 1976-1980, 1981-1985, 1986-1990, 1991-1995, and 1996-2000. We reject absolutely the hypotheses of equality of variances between series for the residuals using Bartlett (df: 122, value: 251.0727, probability: 0.0000), Levene (df: (122, 313), value: 5.233575, probability: 0.0000), and Brown-Forsythe (df: (122, 313), value: 2.663619, probability: 0.0000) for the regression in table 1. We reject also for the regression from table 2 using the following tests: Bartlett (df: 93, value: 212.0552, probability: 0.0000), Levene (df: (93, 208), value: 8.984600, probability: 0.0000), and Brown-Forsythe (df: (93, 208), value: 4.716500, probability: 0.0000).

In the analyses of economic growth on different ways of computing the observations the most appropriate one is on 5 years periods. For one year and 10 years periods the residuals of the regressions are, in general, with a positive serial correlation and a Durbin-Watson statistic under the normal accepted value of 1.8.


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Conclusion Economic growth rates vary dramatically across countries over long period of time creating

big differences in the standard of leaving per capita of its residents. Although the annual growth of per capita GDP in the world wide economies was about 2.0% during 1961-2005, which correspond to an increase of 2.4 times for per capita GDP, some economies has raised their GDP for more than 10 times, having average growth rates of more than 5.5%, and others have decreased their per capita GDP to a half from their initial level in 1961 with average growth rates lesser than -1.5%. The difference between Botswana one the most growing economy and Niger one of the slowest growing economies during 1961 and 2005 was more than 20 times.

The determinants of growth have an important role in explaining these differences. Empiric evidence confirms the conditional convergence and relates economic growth with tow type of variables: initial variables and the control or environmental variables. Using the general framework developed by Barro (1991, 1996, 2003) on a panel date for more than 150 countries with observations computed 5 years, 10 years, 20 years, 40 years period, and annually, during 1961-2000, we found that economic growth is positively correlated with a higher level of human capital through health, accounted by life expectancy at birth, and education in the form of secondary and tertiary school enrollment, and an increase in savings, in openness of the economy, an improvement in the development of the financial and banking system, a raise of gross capital formation, and foreign direct investments, an increase of the real interest rate. We also found economic growth is negatively correlated with a higher level of physical capital accounted by the level of GDP per capita, with government consumption, inflation rate, budget deficit, fertility and population growth, unemployment, and current account deficit. This finding confirm the relations between growth and its determinants from the previous literature on observations computed 10 years, 20 years, 40 years period and annually.

In the analyses of economic growth on different ways of computing the observations the most appropriate one is on 5 years time period because is diminishing the influences of short term fluctuation and encompass the dynamics of growth and its determinants.

In this framework, the evolution and the perspectives of the Romanian growth determinants is mainly positive, although its competitiveness has to grow in order to overcome the new challenges since we have join European Union, as can be read also in “The Global Competitiveness Report 2007-2008”.

Notes

(1) See Barro R., “Economic Growth in a Cross Section of Countries,” Quarterly Journal of

Economics 106, 2, 407-443, 1991 (2) See Barro R., “Determinants of Economic Growth: A Cross-Country Empirical Study”,

Cambridge MA, MIT Press, 1997 (3) Barro R., Determinants of Economic Growth: A Cross-Country Empirical Study,"

NBER Working Paper no. 5698, 1996

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Growth” National Bureau of Economic Research Working Papers 12275, 2006 Barro, R.J. and Sala-i-Martin X. (1995), Economic Growth, New York: McGraw-Hill Barro, R.J., “A Cross-Country Study of Growth, Saving, and Government”, National

Bureau of Economic Research Working Paper nr. 2855, 1989


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Barro, R.J. (1997), Determinants of Economic Growth: A Cross-Country Empirical Study, Cambridge MA, MIT Press

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Jones, C. I., “Sources of U.S. Economic Growth in a World of Ideas”, American Economic Review, Vol. 92 (1), 2002

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*** “European Economy. Enlargement Papers”, European Commission, Directorate General Economic and Financial Affairs, 2002

*** “Report on Macroeconomic and Financial Sector Stability Developments in Candidate Countries”, European Commission, Directorate General Economic and Financial Affairs, 2002

*** “Manual de evaluare a competitivităţii regionale”, Grupul de Economie Aplicata http://www.gea.org.ro/documente/ro/proiecte/manual_2007.pdf, 2007


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COMMERCIAL LIBERALIZATION AND THE RESTRUCTURING

OF THE SYSTEM OF COMPANIES FROM ROMANIA

Ilie GAVRILĂ Ph. D. Professor

Tatiana GAVRILĂ Ph. D. Professor

Academy of Economic Studies, Bucharest Abstract. The foreign commercial liberalization is a characteristic of the evolution of

the global economy and of the national economies during the last half-century and it also is one of the factors of the economic growth and of the accentuation of the national interdependencies, thus contributing to the strengthening of the new phase of economic globalization.

Kew words: Romanian economic policy; commercial liberalization; empiric confrontation.

1. The full opening to the foreign markets – Romania’s strategic option Romania has committed itself to follow this path, the liberalization trend being an

option of economic policy. Relevant is the National Strategy of Economic Development on a medium term, by which an option is made for putting the Romanian economy on the course of a full opening to the exterior”. Amongst the measures endorsed to this aim, during the last years, we mention the following(1):

• Termination of the State monopoly of the foreign trade (1990); • Termination of the import-export licenses starting from 1993; • Implementation of the protocols concluded under the aegis of the Uruguay

Negotiations Round, of the intergovernmental free trade agreements and of some commitments undertaken to IMF and the World Bank for the reduction in 1997 of the general level of the un-weighted average customs duties on imports of food and agricultural products, from 121,7% down to 31,8% and of the export customs duties on certain raw materials (raw, scrap iron, etc.);

• Meeting the obligations undertaken by the Agreement for the Association of Romania to the European Union concerning the gradual reduction of the customs duties (asynchronous in time in Romania’s favour) in order to create, by 2002, the Customs Union with the European Union as a requirement for achieving, in due course of time, after 2007, the full integration of the economy in the EU functional structures and mechanisms. Following a process of gradual reduction of the customs duties, on 01 January 2002 it was achieved the total elimination of the customs duties for the mutual relations, thus achieving a free trade area with the European Union. Their level, starting from 01 January 2001, is given in table 1.


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Customs duties, plain average of the customs duties Table 1

Romanian 2001

EU 2001

All products 19,4% 6,3% Agricultural products 33,2% 16,2% Pisciculture products 21,4% 12,4% Industrial products 15,6% 3,6%

A preliminary conclusion is that the commercial liberalization with the European

Union already was a reality before the adhesion and it became permanent once the adhesion came into effect and when the following events occurred:

• Adoption of the EU tariff that is applied for third parties – differentiated on categories of merchandises – is, on average, by three times inferior to the one applied by Romanian;

• Application of the customs preferences to the countries that are associated to the European Union and which have special agreements with EU (to which Romania automatically becomes part);

• The loss by Romania of its customs preferences as member of the group of the developing countries as it shifted from beneficiary to donor of commercial preferences to the countries that are included by UNCTAD in this group.

All these elements substantially reduced the customs duties collected by the public budget and from 01 January 2007, the customs duties collected from third parties – in accordance with the EU joint Customs tariff (TARIC) – became a source of revenue to the community budget (after deducting a 25% share for covering the collection related expenses).

From the commercial point of view, Romania’s adhesion to EU on 01 January 2007 resulted in the formation of a full Customs Union (UV) between Romania and the European Union plus making a few steps towards achieving the goal of an Economic Union.

The liberalization of the commercial exchanges was not prepared by an ex-ante restructuring of the real economy. The effects are obvious and they can be seen, amongst others, in the evolution of the trade balance and of the current account deficit as well as in the transformation of numerous Romanian firms into trade agents for the merchandises of well-known foreign companies which enjoy a solid reputation.

2. The standard theoretical framework The standard microeconomic theory argues that the foreign commercial liberalization

and the formation of a Customs Union (UV) generates global advantages and obvious welfare earnings for each individual country (or economic groups) for the exporters, importers and for the consumers. In addition, due to the commercial liberalization, the internal price for the domestic and the imported goods, which are part of the same relevant market, shall be formed mainly on the ground of the situation in the European Union.

The extra welfare shall be due firstly to the elimination or the reduction in the customs duties for the merchandises coming from the UV and imported from third parties, these ones entailing a reduction in prices for the imported goods and afterwards, the extra welfare shall be due to the new basis of the formation of the domestic prices. The creation and the distortion of commercial flows are inevitable, as it is shown in Picture 1 and in Figure 1 below.


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Picture no. 1. Creation/Distortion of traffic (trade)

The creation of traffic (trade) means the amplification of a commercial flow or the emergence of a new one which did not previously exist as a consequence of the reduction (elimination) of the customs duties and/or of the quantitative restrictions; a larger part of the needs are fulfilled on the ground of the products coming from the UV members, which are cheaper and which also have a better quality-price ratio and part of the national supply and from third parties is replaced by the one of the companies which reside inside the Customs Union.

The distortion of traffic (trade) means the introduction of some discrimination for third parties in favour of the partners from UV. Customs duties are lost but it is obtained a welfare gain due to the (cheapened) goods coming from the partners from the Customs Union.

In Figure 1 is simulated the confrontation between the supply and the demand on the market for the merchandise „x” by simulating three levels of price: P0 – the internal price in a situation of absolute autarchy; P1 – the internal price when the foreign goods are charged by customs duties, their level being P1 – '

1P for the goods coming from the UV, and P1 – M for the

ones coming from the third parties, '1P - the price from members of U0V0 without customs duties.

Figure 1A Figure 1B

Figure 1

By the opening to the exterior, in a first stage, the internal transactions are made at the price P1, at which the internal market producers can produce under terms of competitiveness-price the quantity Q1 (which is inferior to the situation of autarchy), and the demand expands to C1. It appears a gap between the internal supply and demand (Q1 – C1) which is covered by import (I1, respectively point no. 1 from the diagram on chart 1B): the welfare of the consumers shall increase from PoPxA to P1BPx, respectively by the area P1BAP0. At the same time, is reduced the welfare of the producers who are excluded from the market (jobs are lost, production and profits drop, etc.) from Po AM to P1 CM, with the equivalent of the area P1 PoAC. Overall, the welfare gain of the consumers is superior to the loss of welfare of the producers, the overall welfare gain being equal to the area CAB.

By eliminating the customs duties (Tv) for the merchandises coming from the UV these ones become more competitive, taking over an additional share of the internal market, the real prices (out of which we eliminated the inflation rate) becoming '

1P = P1 – Tv. As a result: a) The internal demand increases to C2; b) The supply from the interior reduces and becomes Q2;

Px Px C

Ox

A

C B

E D

M

PO

P1

'1P

Tv 1

2

Q2 Q1 Q0 C1 C2 I1 I2 O


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c) The demand for the imported goods expands and becomes I2 (point 2 on the diagram from chart 1B.

The aggregated effect would be the following: 1) The increase of the welfare of the consumers which on the chart is shown by the

area '1P P1BE ; 2) The loss of welfare for the producers (production loss, jobs – and consequently

wages –, profits etc.) the equivalent of the area '1P P1CD ;

3) The loss of cash (customs duties) to the public budget which is equal to (I2 × P1) – (I2 × '

1P ). The formation of the UV and the adhesion to the European Union generate, besides

the situations presented above, the phenomenon which is synthesized by the theory of the foreign trade by creation and the distortion of traffic, also known as the Viner ambiguity2. The liberalization of the commercial exchanges with the European Union and the adoption of the single tariff imposed to third parties (inferior to the one previously in force in Romania) to which is added the elimination of the cases of preferential trade with certain states (see the free trade area with the Republic of Moldova, etc) lead to an increase of the imports from EU (after January 2007, these ones were correctly named “community acquisitions”), which represent a creation of traffic, which is accompanied by the following:

a) The elimination of certain domestic producers from the economic activity which, due to their lack of competitiveness, are taken out of the market with the equivalent Q1-Q2;

b) The reduction in imports (usually a relative one) coming from third parties who become discriminated compared to the community partners (traffic distortion);

c) Unbalance effects over the trade balance. But the liberalization process must also be regarded from the reversed point of view, the

one of the liberalization (not a full and absolute one) of the products from Romania to EU’s single internal market (Romanian abbreviation “PUI”): if these ones are competitive, the overall welfare of the producers (both companies and employees) who export in the European Union shall increase and consequently, certain categories of budgetary revenues shall increase.

The theory Stopler-Samuelson argues that the foreign commercial liberalization shall also generate the increase in the revenues resulted from the use of the abundant and cheap factors of production and the reduction – even if a relative one – in the revenues resulted from the use of the scarce factors. It is considered that, for the overall category of factors owners, take place the compensation of the losers by the advantages obtained by the beneficiaries, thus resulting even a net welfare gain which is distributed in an even more unequal way than it previously was.

The prices of the abundant production factors increase relatively while those of the rare factors drop, fact that can determine a trend towards the convergence of the prices (revenues) of the production factors at a global level. The assumptions on which is grounded the above-mentioned theory (the perfect mobility of the factors at a global level, the full freedom to establish the prices of the production factors, the inexistence of the national preferences and their rapid adaptation to the state of the supply and demand, etc) would lead only to a tendency of reduction in the differences in remuneration of the production factors, including to a convergence of their evolution at the EU level and to their equalization.

3. The empiric confrontation

Starting from the theoretical framework of the commercial liberalization provided by the micro-economy, the empiric confrontation reveals the following aspects:

1. The real prices (adjusted with the average inflation rate) on the relevant markets, in which the goods coming from the UV hold a rising percentage, have increased. The analysis


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reveals that these prices did not shrink, not even in 2007 when, during the first eight months the national currency strongly appreciated against the euro, this being an additional factor, besides the elimination of the customs duties. We can thus conclude that the equivalent of the eliminated customs duties (or those which were reduced on the goods coming from third parties) turned into economic allowances for the importers and the distributors of such goods.

The import and the distribution of the goods coming from the European Union and from third parties is, in Romania, one of the most profitable economic activities, thus being diverged the gains and the overall economic advantages of domestic welfare which, under normal circumstances, would benefit to the consumers and to other categories of companies. This reality is the result of the way in which the markets function but is also the consequence of some decisions of economic policy, amongst which we mention the premature liberalization of the capital account, of the hard currency market and the introduction of a sole percentage of taxation of the direct revenues.

2. The economic liberalization stresses the international mobility, especially the one of the merchandise goods – materials and services – and of the capital. As a result, companies from different countries have access to relatively similar technologies, and the competitive advantages, the specialization and the inter-branch trade decisively depend on the endowment with workforce (highly, average or below average qualified) and on the quality of the managerial-organizational methods3.

The basis of the commercial competition and of the international specialization is subject to change from the superiority of the technology and the abundance of the factors to the relative availability of qualified or under-qualified workforce. In the OCDE countries, the processing industry – and not only it – was reorganized and it was focused on operations, functions, intermediate and end-use goods which need highly qualified workforce, creative, receptive to changes, capable to rapidly generate and to assimilate the innovation. Between these countries it is observed the convergence tendency of the salaries paid to the employees with superior and medium qualification levels; the demand for qualified workforce has increased and the odds of finding a job by the under-qualified workers has dropped. Are excepted the activities for which the production is strictly localized geographically close to the consumption (constructions, the personal services) or which are based on a perfectly immobile production factor (the land) and to which it is granted a high economic value as a recognition of its marginal utility.

As a result, the gap (relative but most of all absolute) between the revenues of the qualified workers and those of the workers with a lower qualification, tend to increase and not to converge. The newly industrialized countries – including those which experienced the transition from the centralized economy with compulsory planning – tend to develop an economic structure that is based on functions (primary and support ones) including jobs for the specialized workforce towards goods of low or average range, including intermediary, to which is recognized, by the market terms, the small amount of added value.

This small amount of added value – due to the nature of the specialization which is reserved to them by the strategies of the transnational companies and the orientation of the foreign direct investments, becomes the decisive cause which prevents the insurance of jobs which could attract workforce that is highly qualified, creative and capable to generate technological knowledge and innovation. The natural result is the existence of low salaries.

Consequently, the actions aiming for the increase in wages in order to achieve the convergence with the ones from the developed countries – regardless of the reasons that are invoked: social, humanitarian or politic-populist issues – they strengthen inflation and the current account deficit, increase the uncertainty of the economic growth and lead to the loss of competitiveness of the goods that are produced.


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The fruits of the economic liberalization are beneficial for an economy only if it is accompanied by an active industrial policy (including research and education) which aims to influence the private initiative – both national and foreign – in the real restructuring, durable and profound from the perspective of the two large transitions which Romania’s economy shall undergo: integration with the EU system and assimilating the basis of the New Economy.

4. Restructuring of the system of companies

The commercial liberalization creates a more favourable competition environment, intensifies competition, especially by growth and diversification of the companies and the reduction/elimination of some economic barriers which hindered the geographic mobility of the goods and of the production factors.

The universally accepted economic theory demonstrates specific non-linear evolutions of the system of companies, which are also possible for Romania. The starting point (5) is the balance E0 (Figure 2) characterized by the price (P0), the sales volume (PoCo), the average size of the companies (q0) and the number of the companies (n0) which record a sufficient gain in order to cover the historic costs and the fixed ones in full. The low number of companies on each market offers the possibility of a high margin ( r

op ), as a difference between the price and the marginal cost which can be approximated to the pure profit. The curve of competitiveness (CO) indicates the evolution of the margin, that is the price hike which the low number of companies can impose to the buyers when the market is protected and the principles of the fair competition do not operate.

Figure 2. Foreign commercial liberalization and the system of companies

Average Cost

Marginal Cost

Sales per firm

Price

P0

P1

P01

q0 q1

E0

E1

0 Total sales

Price

P0

P1

10P

P0C0

C0

C1

V1C1

10C

Demand curve

0

Competitiveness Curve (CO)

Number of firms

Profit

Pr0

Pr1

10Pr

n0 n1

E0

E1

n01

A

Curve of the initial profitability threshold (PR)

Curve of the profitability threshold (PR1) after liberalization

0


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The commercial liberalization restructures the system of companies in two sequences: The first sequence takes place after the liberalization, when the number of the

competing companies ( 'on ) increases, the markets are divided and the strong competition

reduces the opportunities to achieve high margins, generating deflation so that the additional profits and the prices become '

opr , respectively 'op , especially on the relevant markets

where the share of the imported goods is significant. In EU-15, the elimination of the reciprocal customs duties, the amplification of the

competition and the division of the markets led to a reduction by 4% of the differences between price and cost (5) except the sectors that are strongly oligopoly such as the car industry, where they have risen.

The second sequence takes shape by three to seven years after the commercial liberalization. We notice, besides the more stiff competition, a general tendency of increases in the fixed costs and in the investments for meeting the environment protection requirements and the technical ones, sanitary, display, including the observance of a high number of product and processing standards. In each industry and on each relevant market mergers and acquisitions are amplified, the tendency to economic concentration and the increase in the average dimensions of the firms (q1 in figure 2) which make the required investments – and which can retrieve the historic fixed costs – obtain scale advantages and remain in the market while those which do not succeed are eliminated. Compared to the dimensions of the market relatively fewer competitors remain (n1 in the chart), markets de-fragmentation occurs while the oligopoly phenomenon amplifies.

Between relatively fewer companies which are larger in size, the competition war is not waged by the price but by other forms and means (the rapid renewal and diversification of the supply, advertising, expenses made in order to achieve high percentages of captive customers, etc.). These ones can generate the resumption of the ascending trend of the price (p1), the possibility to exceed the marginal cost, to increase the profit respectively the margin (pr1) and the concentration of the markets.

The theoretical model above has a particular theoretic-methodological significance but also a practical one, even if the two sequences, of markets and companies restructuring process, cannot be rigorously separated.

In the EU-15 countries, after the formation of EU’s single internal market (PUI), the mergers and the acquisitions recorded outstanding levels, their number being, between 1990-2001, of about 10.000 per annum, with an annual value which has increased from EUR 100 billion to EUR 2.400 billion. They took place especially inside each member state, between autochthonous capitals (55%) in order to consolidate the position of the private autochthonous capital in the competition on PUI.

The mergers and the acquisitions between autochthonous and foreign companies represented around 45% of which half of them were intra-community and half with extra-community partners (5). The mergers and the acquisitions were more intense than in the countries with smaller national markets and especially in the processing industry and after 1993, the process grew for services too. We should point out the fact that in the EU countries, the mergers and the acquisitions took place especially at the basic levels, between small and medium sized companies, so that the degree of concentration (the share of the four large firms) has decreased. In exchange, the intra-community mergers and acquisitions usually took place at the top, between large companies, so that the percentage of the four large companies, for the entire EU, has increased on most of the relevant markets.

The phenomenon described above also took place in Romania: between 2001-2005 the number of companies increased by 39,1%, especially by the contribution of the small and medium sized enterprises SMEs which grew by 39,4%. We can observe the tendency of


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division of the markets and of investments growing (6) but the performances of the most dynamic sector (SMEs) are relatively poorer: labour productivity, calculated in accordance with VAB and turnover, although increases it still becomes inferior to the one from the large companies (6) which also points out a process of intra-sector mergers and acquisitions (their number drops by 3,2%) together with the increase in the dimensions and in the market share.

The restructuring of the system of companies is made under the incidence of the effects of the market but also by the active industrial policies which have the role to anticipate and to influence the mechanisms of the market. Such an opinion imposes itself if the effects of PUI are regarded both from the global point of view (as a tendency at the level of the entire community system formed by the 15 + 10 + 2 = 27 members) and also potential, and differentiated at the levels of the different states and groups of countries which have close levels and structures. The standard analysis and the official evaluations attest the fact that the effects of the economic integration are clearly favourable. Obtaining the economies of scale and of diversification, the increase in competitiveness, the better allotment of the resources in accordance with the competitive advantage, the tendency of equalization, at the superior level, of the remuneration of the production factors and the achievement of the convergence of the real revenue per capita are a few of the statistically found tendencies, at the EU level, as an overall average. The more detailed analysis has also shown less positive aspects: together with the more bureaucratic and more complicated decision making process, the agglomeration effect (7) becomes concerning especially in the intellectual spheres. It is believed that the potential benefits of integration can be reduced or cancelled of what it is known as the agglomeration effect in the already existing power centers. Thus, the flows of foreign direct investments become preponderant in the framework of the relations between the developed countries (8) or they are oriented mainly towards GER (regional economic groups) which already exist in the most developed areas and which are integrated in the systems of the integrated international production (SPII) of the large companies (9); the most important strategic decisions are concentrated in the power centers from the advanced countries and within each one of this, in the areas which are the most developed from the economic-financial and IT points of view. The relevant functions from the chain of values, having the capacity to create added value, are concentrated in these areas too. Due to the commercial liberalization, many companies from the less developed countries are marginalized.

At the EU-15 level and in each country in the developed center are concentrated the high revenues, the activities and the jobs which are the best remunerated and there are maintained large gaps between center-outskirts (national and community) although they tend to be relatively reduced (5, 262-263).

In order to prevent or to reduce the agglomeration effect it is necessary that Romania too, until the full integration, to take measures in order to achieve the convergence organizational – research, economic sector, public administration – in order to achieve the following:

1) Identification of the fields (functions) of competitive advantage and the support granted to the companies from Romania for the efficient integration in the system of values of the large transnational companies (10).

2) Adoption of the measures that are needed in order to consolidate the private autochthonous capital, the stimulation of the mergers and acquisitions in order to coagulate the Romanian global companies which are competitive on PUI. This aspect was neglected during the formation period, the expectations being concentrated mostly on the foreign capital and investments (including the large privatization deals with strategic investors which often were not authentic privatization deals and some of the investors were strategic speculators). The consolidation of the private autochthonous capital must be made not from the point of view of the confrontation with the foreign one – idea which is totally


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counterproductive in the globalization stage – but from the point of view of a real partnership, thus avoiding the situations of dependency which emerged. In order to achieve this goal, one must stimulate the process of concentration of the private autochthonous capital and the creation of strategic mergers and partnerships which are durable and which are able to amplify the role of the companies from the SMEs sector. If the chance to create two or three multi(trans)national companies with private capital, majority Romanian, was missed, it maintains itself as a strategic objective for the years to come. All transnational companies are first of all national, they have a national base of formation, of origin of the capital and of the strategic management. In any advanced country, the economy gravitates around a few transnational companies which are „national” by the structure of the consolidated capital and Romania is one of the few European countries which does not have any location whatsoever for any transnational company. The economic globalization but also the European integration are achieved efficiently by the role and the place that is also held by the few multinational companies which have a location in the country in question and due to which the modern SMEs sector gets prosperous and strengthens its position.

3) Acceleration of the modernization of the infrastructure and the professional training in accordance with the new fields of competitive advantage of the Romanian companies and the requirements of the transition towards the New Economy.

Notes

(1) Although Romania has joined the European Union it shall still achieve integration in its structures in the course of time. The international economic integration is a complex process, which is implemented gradually, by going through several stages (phases, forms): the simplest of them is the free trade area between the member states followed by the implementation of the customs union and the creation of a single market for several states. The countries which are EU members (the 15) have gone through these forms and are in the phase of edification of Economic and Monetary Union (which most of them have already implemented). By confronting the characteristics of each stage with the state of the relationship between Romania and the European Union, we consider that at the present moment, we find ourselves in the stage of transition between the UV and the Single Market.

(2) Also named the Viner ambiguity. See Jacob Viner, The Customs Union Issue, Carmegie Endowment for international peace, New York, as he was the first to crystallize this phenomenon in a theoretical plan and by practical reasoning. For details, see Mayes D. (1978) The Effect of Economic Integration on Trade, Journal of Common Market Studies, XVII, sept. 1-25; Richard Baldwin, Charles Wyplosz (2006), Economia integrării europene (The economy of European integration), Editura Economică, Bucureşti; Jacques Pelkmans (2003), Integrare europeană. Metode şi analiză economică (European integration. Methods and economic analysis), cap. 5-6, Institutul Român, Bucureşti.


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Bibliography

From the vast reference material we especially recommend: Aurel Iancu Liberalizare, integrare şi sistemul industrial (Liberalization, integration and the industrial system), Editura Expert, 2002; Daniel Dăianu, Radu Vrânceanu, România şi UE (Romania and the EU), Polirom, Iaşi, 2002; Postolache Tudorel, Strategia naţională de pregătire a aderării României la Uniunea Europeană (The national strategy for preparing Romania’s adhesion to the European Union), Snagov, iunie 1995, Niţă Dobrotă ş.a., Liberalizarea schimburilor economice externe (Liberalization of the foreign economic exchanges), Editura Economică, 2003.

Adaptation after Richard Baldwin, Charles Wyplosz (2006), Lucr. cit. (Quoted works), p. 181; 262

Anuarul statistic al României (Romania’s statistic year-book) 2006, p. 576; Ilie Gavrilă, Tatiana Gavrilă, Raţionalitatea economică şi social-umană a IMM-urilor (Economic and social-human rationality of the SMEs), Tribuna Economică nr.38/2007

Niţă, Dobrotă, Lucr. cit. (Quoted works), pp. 44-41; Barbara Dluhoch, On the fate of newcomers in the European Union: Lessons from the Spanish Experience, Banca de Espana, Documento de Trabajo, 1996

World Investment Report, 1994, 2001, 2002, Transnational Corporations and Integrated International Production (http://www.unctad.org/wir)

Gavrilă, I. (coord.), Mediul concurenţial şi politica Uniunii Europene în domeniul concurenţei (The competition environment and the policy of the European Union in the field of competition), Editura Economică, 2006, pp. 71-92

Gavrilă, I., Gavrilă, Tatiana, “Evoluţia IMM-urilor româneşti în context European” (The evolution of the Romanian SMEs in European context), Tribuna economică, nr. 39/2007, pp. 66-69

Help D. ş.a., Transformări globale (Global transformations), Editura Polirom, Iaşi, 2004, pp. 221-222

Wood A., North-South Trade, Employment and Inequality: Changing Fortunes in a Skill-Driven World, Oxford U.P., 1994


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THE SUSTAINABLE USE OF NATURAL RESOURCES AND WASTE MANAGEMENT –

PRIORITY AREA FOR ENVIRONMENTAL POLICY IN THE EUROPEAN UNION

Camelia RAŢIU-SUCIU

Ph.D. Professor Valentina Elena TÂRŢIU

Ph.D. Candidate Academy of Economic Studies, Bucharest

Abstract. The concernment for environment has reached a distinct character in the context

of accelerate diminution of natural resources, quickly deterioration of water, air and soil quality. In the last decades the EU environmental policy has evolved from a group of measures

preponderant technicals, regarding pollution limitation, to measures that identifies causes, institutes financial responsibilities for the damage.

At the base of environmental policy in the European Union there are the Environment Action Programmes.

The Sixth Environment Action Programme of the European Community 2002-2012 identifies four priority areas, and outlines actions that need to be taken to achieve them: climate change, nature and biodiversity, environment and health, natural resources and waste.

The paper aims to treat aspects dealing with priority area “natural resources and waste” such as: the sustainable use of natural resources, waste prevention and their impact upon the environment, decoupling of economic growth from environmental degradation, the indicators to measure decoupling.

The end of the paper presents the stage of approach of this priority area in Romania. Key words: environmental policy, sustainable use of natural resources, waste

management system, conservation of natural resources. REL Classification: 15C, 15D, 15G

Environmental protection represents, in the context of diminution of natural resources and quickly deterioration of water, air and soil quality, one of the major preoccupation of the European Union.

EU environmental policy has evolved from a group of measures preponderant technicals, regarding pollution limitation, to measures that identifies causes, institutes financial responsibilities for the damage.

Over the last 30 years the EU has built a comprehensive legislative framework for environmental protection.

In the present environmental aspects are compulsory for the other policies. Environmental policy does not act independently, reflects society interest in this direction.


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At the base of environmental policy in the European Union there are the Environment Action Programmes.

The Sixth Community Environment Action Programme (6th EAP), adopted in 2002, establishes the Community framework for environment policy for the period from July 2002 to July 2012.

The Programme sets out four environmental policy priorities: 1. climate change 2. nature and biodiversity protection 3. health and the quality of life 4. conservation of natural resources and waste management For each of these priority areas, the 6th EAP sets out specific objectives and priority

actions: protection and rehabilitation of natural ecosystems conservation of biodiversity in the European Union improving the quality of life, reducing the negative environmental impact of pollution on human health

the sustainable use of energy renewable resources met the quality level of air which has not a negative impact on the others environmental factors and on human health

waste prevention and growth of the recycled waste quantity reducing waste quantity for landfill and also the quantity of dangerous waste decoupling of economic growth from environmental impact

After the 6th EAP adoption, seven thematic strategies were developed covering important aspects of environmental protection, as :

1. soil protection 2. marine environment protection and conservation 3. the use of pesticides in the context of sustainable development 4. air pollution 5. urban environment 6. waste recycling 7. the sustainable use of natural resources The thematic strategy on the sustainable use of natural resources, adopted in 2005,

provides a long-term framework – the next 25 years for achieving decoupling of economic growth from environmental impact.

Decoupling of economic growth from environmental impact can be: absolute – the economy grows, while environmental impact remains stable or

decreases relative – the economy grows at a faster rate than environmental impact The two types of decoupling are illustrated in Figure 1:


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Figure 1. Types of decoupling De-linking economic growth from environmental impact take into account two

process shown in Figure 2: decoupling of resource use from economic growth, which implies a reduction of

resource use per unit of production decoupling of environmental impacts from resource use, which implies a

reduction of environmental impacts per unit of resource use In order to measure progress towards meeting the decoupling objective, the EU

proposed that three indicators to be developed until 2008: resource productivity - this indicator measures the value added per unit of resource

input; reflects decoupling of resource use from economic growth (€/kg) resource-specific impacts - this indicator measures the environmental impacts per unit

of resource use; outlines decoupling of environmental impacts from resource use (im pact/kg)

eco-efficiency - can be derived by dividing resource productivity by resource efficiency; measures decoupling of environmental impacts from economic growth ( € /impact)

Figure 2. De-linking economic growth from environmental impact

2005 2010 2015 2020 2025 2030 0

0,5

1,0

1,5

2,0

Decrease of overall impacts on the environment

Growth of overall impacts on the environment

Economic growth

Relative decoupling Absolute decoupling

Resource productivity (Є/ kg)

Decoupling of resource use from economic growth

Decoupling of environmental impact from resource use

Resource specific impacts (impact / kg)

Eco-efficiency (Є/ impact )

Economic growth

Resource use

Environmental impact

2005 2030


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The main modalities by which can be achieved decoupling of economic growth from environmental impact are:

improving resources efficiency by using renewable resources at a rate which not exceed their renewable capacity

limitation of waste volume and the enhancement of efficiency of natural resources use taking into account the life cycle concept and promoting recycling

improving social and environmental performance of technological products and process

reducing the consumption of non-renewable resources and the ecological impact of raw materials use

promoting eco-efficient innovations taking into account the streams between environment, economy and society –

these are briefly shown in Figure 3:

Figure 3. The streams between environment, economy and society The analyse of streams between society and environment reveals the following

aspects: environment education of the citiziens, indifferent of country and age, contribute

to environment conservation and protection Consequently is necessary that each human being to be formed in the spirit of saving

material and energy resources, appreciate the values created by ancestors, protect them against any distructive forms (Vişan, 1998, p. 26).

the conveyance of the right information to the consumers and producers about sustainable use of resource may contribute to the reduction of pressure exert by consumption patterns on the environmental resources

The EU Parliament required the enhancement of efforts in this sense, taking into account that economic prosperity will be possible only in a market system in which all the capital forms, inclusive natural capital, are appreciated at the right value.

We are in the situation in which the natural capital can not be viewed as a legacy from our ancestors but represents a loan from our children’s.

Environment

SOCIETY

ECONOMY

Pressure exert by the consumption patterns on the environmental resources

The citiziens responsibility for the environment

Health and human security dangers caused by degradation of the environment

Investments for environmental protection

Pressure exert on the resources by the production activities

Economic costs for environmental protection

Hiring opportunities and living standard; incomes distribution; pressure on the social and cultural systems

Quantity and quality of labour force


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The analyse of the stream environment – economy: Degradation of the environment can be understood as an example of "market

failure" and has very real economic costs. When designing policy it is therefore essential to identify and address the "costs of inaction". For example, air pollution results in losses in productivity and medical expenses that cost the EU economy € 14 billion each year (COM 225, 2007: p. 6)

well designed environmental policies can also contribute to other objectives of increasing competitiveness, stimulating economic growth and enhancing job creation.

For example, environment policy has helped the development of the sector of environmental technologies. The annual turnover of European eco-industries is € 227 billion which represents approximately 2.2% of EU GDP. The sector accounts for 3.4 million full time jobs or 1.7% of total EU employment (European Commission, DG Environment, 2006: p. 10)

In the context of decoupling economic growth from environmental impact, waste management has a great importance at the EU level.

Although by the waste policy of the EU in the past 30 years, some successes were achieved, the analyse of actual stage in the waste field at the EU level outlines the following aspects (European Parliament resolution, 2007: pp. 2-3):

Waste volumes continue to grow, both for hazardous and non-hazardous waste The potential for waste prevention and recycling is not fully used Illegal (cross-border) waste shipments are still increasing Waste management generates emissions to air, water and soil Legislation is missing for certain important waste streams Waste legislation is in many cases poorly implemented Member States have different approaches to solving waste problems The current wording of Community waste legislation gives rise to some

interpretation problems in most Member States disposal, in particular landfill, is still the most common form of waste treatment

there are no adequate Community minimum standards applying to many recovery and recycling facilities, which results in different levels of environmental protection in the Member States, eco-dumping and distortions of competition

The European Parliament resolution on a Thematic Strategy on Waste Prevention and Recycling underlines (European Parliament resolution, 2007: p. 6):

the importance of achieving common minimum standards for recovery and recycling at EU level, and stresses that a level playing field will only be established when the use of economic instruments is approximated throughout the EU

the need for better EU cooperation in managing cross-border waste problems the importance of source separation of waste, as well as recycling targets and

producer responsibility in order to increase the recycling rate of certain waste streams that full implementation of existing Community waste legislation and equal

enforcement across all Member States is a key priority the key importance of the waste hierarchy, which sets out priorities for action in

descending order: – prevention – re-use – material recycling – other recovery operations, for example energy recovery – disposal,


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as a general rule of waste management in achieving the aim of reducing the generation of waste as well as the adverse impacts on health and the environment resulting from waste generation and management.

Also, The European Parliament resolution propose a timetable on the landfill of waste:

from 2010, a ban on landfill of non-pretreated waste with fermentable components

from 2015, a ban on landfill of paper, cardboard, glass, textiles, wood, plastics, metals, rubber, cork, pottery, concrete, brick and tiles

from 2020, a ban on landfill of all recyclable waste from 2025, a ban on landfill of all residual waste, except where this is

unavoidable or hazardous (e.g. filter ash) Romania is an average-size country comparatively with other European countries,

having an area of 238,391 km2 (the thirteenth country in Europe as size), a population of about 21.7 million inhabitants (Statistical data for 2004) and an impressive natural capital.

By contrast, in Romania resource consumption and waste quantities are high, exceeding the carrying capacities of the natural environment.

Actions as exploitation and manufacturing of non-renewable resources with inefficient technologies, the permissive regime of environmental standards application, the low level of investments for environmental infrastructure, non-including the environmental externalities in costs, led to a gradual degradation of the environment.

The European Union accorded in the case of Romania transition periods in the waste management field for:

Packaging and Packaging Waste (Directive 94/62/EC, modified by the directive 2004/12/CE)

Waste landfilling (Directive 99/31/EC) Romania assumed the obligation to cease activity on 137 landfills in urban areas

covering about 427 ha until 16 July 2009 and on 101 municipal waste landfills, representing about 301 ha, between 16 July 2009 and 16 July 2017.

Apart from the landfills in urban areas, in Romania there are 2686 dumping sites in rural areas, the most having a surface of 1 ha. The closure and cleaning of these spaces will be done until 16 July 2009, in parallel with the extension of collection services in rural areas, the organization of transport and transfer systems and construction of zonal landfills (POSM, 2007: pp. 26-27)

Waste incineration (The Council Directive 2000/76/EC)

Until 31 December 2008 will be close gradual 110 burning installations for dangerous medical waste.

Taking into account the social and economic conditions of Romania, dangerous waste management requires the construction of a capacity for incineration of about 63000 tonnes/ year, which will include: industrial dangerous waste of about 60000 tonnes/year which in present are landfilled or stocked, also medical dangerous waste of about 3000 tonnes /year, which could be incinerated together with the industrial dangerous waste.

Electrical and electronic waste (The European Parliament and The Council Directive 2002 /96/CE , modified by Directive 2003/108/CE)

The target regarding collection of electrical and electronic waste is 4kg/person/ year and is necessary to be achieved until 31 December 2008.

Import, export and waste transit (Regulation 259/3/CE) The requirement of these transition periods are due to deficiencies recorded in the

field: precarious infrastructure for waste collection, transport and elimination, weak


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awareness of the citiziens and economic agents about the adequate waste management, limited capacity of authorities to elaborate viable project proposals, the big number of sites damaged by pollution caused by economic activities and unsuitable landfill of waste.

The National Strategy on Waste and the National Plan of Waste Management in force, certify that in Romania there is the necessary framework for the development and implementation of the waste management system, efficient from the economic and environmental point of view.

Since April 2007, Romania has a new instrument in the waste field: The Regional Waste Management Plans. These plans have a key role in the development process of the waste management, promote co-operation between regional and local authorities, citiziens and business environment.

Also there are starting point for the assessment of financial requirements, for operation schemes of waste collection, reuse, recycling and disposal.

Because the needs for direct environmental investments to comply with the EU legislation are particularly high, Romanian authorities opted to create a specific operational programme focused on environmental infrastructure, but dealing with other environmental issues as well.

On July 12, the European Commission approved the operational programme for the environment for the period 2007-2013, cofinanced by the European Regional Development Fund (ERDF) and Cohesion Fund (CF).The total budget of the programme is around EUR 5,6 billion and the Community assistance amounts to EUR 4,5 billion.(MEMO, 2007: p. 1)

Among priority investment fields there are: development of an integrate municipal waste management system and selective waste collection system, promotion of waste recycling and development of facilities for waste treatment.

The global objective of the programme is to improve the living standards and the environment.

The sustainable use of natural resources and waste management are environmental problems which are rooted in the way Romania uses its land, and in its economic structure and citiziens ways of life.

Better awareness about environmental and health effects would positively impact our daily choices on what to buy, where to live and work, and where and how to travel. Would encourage improvements in global eco-efficiency and the equity that secure quality of life.

The examination of sustainable use of natural resources and waste management takes into account that we live in the XXI century, in the knowledge based economy, conditioned of achieving economic performance, with the expert systems.

Beside the multitude of characteristics of the knowledge based economy, technologies generation, exploitation and improvement in the field of sustainable use of natural resources and waste management become important wide-spread activities, which condition the survival and the performance.

Bibliography

Ciupagea, C. (coord.), Manoleli, D., Niţă, V., Papatulică, M., Stănculescu, M. (2006). „Direcţii strategice ale dezvoltării durabile în România”, Institutul European din România

Vişan, S., Creţu, S., Alpopi, C. (1998), Mediul înconjurător.Poluare şi protecţie, Editura Economică, Bucureşti


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http://ec.europa.eu/environment/newprg/index.htm - „The Sixth Environment Action Programme of the European Community 2002-2012”

http://ec.europa.eu/environment/natres/pdf/ia_com_en.pdf – “Impact Assessment of the Thematic Strategy on the sustainable use of natural resources”, COM(2005) 670, Brussels

http://eur-lex.europa.eu/LexUriServ/site/ro/com/2007/com2007_0225ro01.pdf- „Examinarea intermediară a celui de-al şaselea program comunitar de acţiune pentru mediu” COM(2007) 225, Bruxelles, 30.4.2007

http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:52007DC0225:RO:NOT Comisia Europeană, DG Mediu, „Industria ecologică, dimensiunea acesteia, ocuparea forţei

de muncă, perspective şi bariere în calea creşterii în Uniunea Europeană extinsă”, septembrie 2006, raport final.

http://www.adrnordest.ro/getdoc.php?id=1017- “Programul Operaţional Sectorial de Mediu 2007-2013”

http://europa.eu/rapid/pressReleasesAction.do?reference=MEMO/07/303&format=HTML&aged=1&language=RO&guiLanguage=en – MEMO / 07 / 303 – Bruxelles 25 iulie 2007 –România –POSM

http://www.europarl.europa.eu/sides/getDoc.do?pubRef=-//EP//NONSGML+TA+P6-TA-2007-0030+0+DOC+PDF+V0//RO- Rezoluţia Parlamentului European privind o strategie tematică privind reciclarea deşeurilor

http://www.infoeuropa.ro/jsp/page.jsp?cid=194&lid=1&id=202- Protecţia mediului înconjurător (capitolul nr.22)

http://ec.europa.eu/environment/waste/ http://www.anpm.ro/index.php?_init=global.static&file=legislatie_deseuri- Legislaţie

deşeuri http://reports.eea.europa.eu/brochure_2007_4/en/Landfill_brochure.pdf


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COSTS, BENEFITS AND INDIVIDUAL PREFORMANCE INDICATORS OF SOME

IMPORTANT PUBLIC INSTITUTIONS IN ROMANIA IN THE FIRST YEARS AFTER EU JOINING

Aurelian Virgil BĂLUŢĂ

Ph. D. Lecturer Spiru Haret University

Abstract. This communication provides an analysis of some important state public

institutions considering the correlation between the costs they engage, the expected benefits, benefits effectively obtained by them and their individual performance indicators.

The costs of each public institution are those which are in the budgetary execution. If they are not identified in the consolidated balance sheet of the state, referral is made to calculations based on some normative regulations which approves the maximum limits for expenses.

The potential benefits are assessed in money value based on the tasks delegated flowing from the normative acts for the respective institutions establishment. A series of specific performance indicators are suggested for the main institutions which are under the scope of this analysis. Starting from these indicators, in correlation with the level of the costs, it is possible to establish how much added value brought such an institution in Romania, or if the respective institution was an actual budgetary resources consumer.

Key words: public institution; cost of public institution; benefits of public institution;

performance of public institution.

Introduction The public opinion attentively monitors the activities of the main state institutions.

Many times however, one can notice the lack of a set of criteria concerning the quantitative assessment of this activity. And less are used criteria for a strict economic approach to the activity of the state institutions. The tax payer must be able to assess the economic efficiency of the main public institutions, to the extent to which the economic theory allows this.

The costs of each public institution are those in the budgetary execution. If they are not identified in the consolidated balance sheet of the state, referral is made to calculations based on some normative regulations which approve the maximum limits for expenses.

The potential benefits are assessed in money value based on the tasks delegated flowing from the normative regulations for the respective institutions establishment. In this respect, a series of performance indicators specific for each institution [under the scope of this analysis] is needed. Starting from these indicators, in correlation with the level of costs, it is possible to establish how much added value brought such an institution in Romania, or if the respective institution was an actual budgetary resources consumer.


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A. The chief of state One of the important institutions is that of the chief of state, respectively the President

of Romania. According to the Constitution “The president of Romania stands for the Romanian state and is the guarantor of the national independence, of the country’s territorial unity and integrity. The main prerogatives of the head of state are presented as follows:

a. The first category of attributions refers to the democratic functioning of the power mechanisms in state.

1. He is responsible for the observance of Constitution and for the good functioning of public authorities. In this respect, the president exerts a mediator function within the state powers, as well as between the state and the society. This involves observing a series of legal incompatibilities and immunities:

- During the mandatory period, the president of Romania cannot be member of a party and cannot discharge any other public or private function.

- The President of Romania has the right to immunity. 2. He appoints a candidate as a prime-minister and forms the Government according

to the confidence vote given by the Parliament”. 3. In case of governmental reshuffle or of vacant position, the President revokes and

appoints some members of the Government, at the prime-minister’s proposal. 4. He consults the Government regarding the important and urgent issues. In this

respect, he can participate at Government meetings where there are debated problems of national interest concerning the external politics, the country’s defense, the maintenance of public order and others, at the prime minister’s request.

5. He informs the Parliament about the main national and political problems. 6. He dissolves the Parliament if: - it did not give the confidence vote for the Government formation within 60 days

from the first requirement. -after consulting the presidents of the two Chambers and the parliament group leaders -after the rejection of at least two mandate requests. 7. He urges the people to express their wish regarding the national issues, by means of

a referendum, after consulting the Parliament. b. The second set of attributions concerns the external politics 1. He signs international treaties for Romania, which are negotiated by the

Government, and submits them to the Parliament for ratification, in a reasonable term. The other international treaties and agreements are signed, approved or ratified according to the established-by-law procedure.

2. He accredits and recalls Romania’s diplomacy representatives and approves the formation, the dissolution or the changing of diplomatic missions, at the Government’s proposal.

c. The third category of attributions refers to the national defense 1. He is the commander of army forces and the president of the Country Defense

Supreme Council. 2. He has the right to order, with the Parliament’s previous approval, the total or

partial mobilization of army forces. d. In exceptional situations, he has the right to institute, according to the law, the state

of emergency in the whole country or in some territorial-administrative unities. e. The honorary attributions of the President of Romania are: 1. offers decorations and honorary titles. 2. awards the ranks of marshal, general and admiral; 3. appoints in public functions, according to the conditions stipulated by the law; 4. gives individual pardon.


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From all the above mentioned, it results that the majority of attributions concern the state functioning, in normal or exceptional conditions. The attributions, by means of which the President of Romania generates mainly added value, are those in the category of external politics. More meetings with the chiefs of state must stand for more treaties or international agreements. These, in their turn, determine a boost in the business of economic agents or opportunities for each of these country citizens. The strict economic analysis of the state chief’s agenda must emphasize the importance of these activities. As specific economic parameters or as specific economic performance indicators for the President, I recommend:

- meetings with state chiefs or government meetings which should lead to progresses in the bilateral relations;

- participations at international manifestations which improve our country’s position at international level;

- agreements and treaties following the state chief’s meetings or his participation at -international manifestations.

On account of these indicators, there can be determined the total medium cost of each action or project, having a positive economic impact.

The costs of the state chief’s institution can be calculated by summing up the explicit and the implicit when the state head benefits from tax exemption. In Romania, this system is no more applicable.

The assessment of quality of each of the state chief’s mandates should be also made through a comparative analysis of function costs with reference to the performance indicators. The analysis costs-performance should have also been made for the projection of the basic constitutional frame {analogy between the costs for a monarch and those for a president}.

B. The Government The Government takes action according to its governing program which must be

approved {accepted} by the Parliament. The main constitutional attributions of the Government are:

- it is responsible for the internal and external politics of the country - it exerts the general management in the public administration. The Government exerts the following functions: a. the strategy function, by means of which it is elaborated the strategy of applying

the governing Program; b. the regulation function, which helps to the elaboration of the norms framework and

institutional frame, necessary to attain strategic objectives; c. the administrative function of state property, which ensures the administration of

state’s public and private property, as well as the services administration , representing the state’s responsibility;

d. the representation function, which ensures, in the name of the Romanian state, the representation on external and internal plan.

e. the authoritative function in the state, which ensures the control of application and observance of the rules in the domain of defense, public order and national security, as well as in the economic and social fields and in those of the functioning of the institutions subordinated to the Government.

The instruments through which the Government discharges these attributions and functions are presented as follows:

A. Instruments for normative activity a. The current normative activity which involves making decisions. The decisions are made in order to organize the laws’ execution.


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b. The normative activity through legislation delegation involves adopting rules. These are issued on account of some special adopted rules, within the limits and conditions stipulated in it.

c. The normative activity which engages the Government’s responsibility is realized in this way:

Step 1. In a common meeting, with the Deputy and Senate Chamber, the Government declares its responsibility for a program, a general political statement or for a law project.

Step 2. The Government was not dismissed on the basis of a censor motion which was introduced as a consequence of its taking responsibility;

Step 3. It is considered as adopted, the law project which was presented, modified or completed, with amendments accepted by the Government, and the application of this program or of the declaration of general politics becomes compulsory for the Government.

d. The exceptional normative activity through the adoption of some emergency decisions

The Government can adopt emergency decisions only in special situations where there is no delay, but it also has the obligation to motivate the reason of emergency.

B. Instruments for discharging the general management attributions in public administration

The general management attributions in t public administration suppose: a. informing the Parliament; b. answering questions, interpellations and simple motions. 1. The Government and other public administrations authorities, within the frame of

the Parliament’s control of their activity, must present the information and documents requested by the Deputy Chamber, the Senate or the Parliament Commissions, by means of their presidents. When a legislation initiative involves the change of the state budget stipulations or of the state social insurances budget, requesting information becomes compulsory.

2. The members of Government have access to the Parliament’s works. If their presence is needed, their participation is compulsory.

3. The Government and each of its members must answer the questions or interpellations of the deputies and senators, by observing the rules of the two Parliament Chambers.

The doctrine stipulates that generally, a Government must be judged and appreciated form an economic point of view, through the indicators that show macroeconomic parameters. The main indicators which reflect the results of the governmental actions are: the inflation rate, the unemployment rate, the obtained budget income, the budgetary income and the external payment balance.

At the individual level, relevancy is given by the population’s real income {salaries, pensions, etc}, the individual and goods’ insurance, the natural environment, the public services which are accessible to every citizen. The Government’s contribution will be given by the difference the respective parameters make, between the end of the mandate period and the beginning of it. It is the analysts’ task to appreciate the conjuncture.

However, there is a need to identify those indicators regarding the Government’s direct and personal contribution within a given conjuncture. From a liberal perspective, the number of the normative acts exceeding current activities are considered counterproductive. The Government should not interfere in the legislative activity. Thus, its performance will be proportionally reversed with the number of orders and emergency orders adopted by the Government.

A great number of interpellations show an increased wearing in the relation with the Parliament. Concentration in these aspects also represents a good functioning of the state.


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C. The Ministry of Economy and Finance The Ministry of Economy and Finance discharges the following functions: a. of strategy. It ensures - the elaboration of the strategy of putting into operation the governing Program in the

public finances. - the elaboration of the strategies and plans regarding the economic increase in

industry, energy, mineral resources, defense industry; - the elaboration of strategies and plans of export promotion; - the elaboration of strategies and plans concerning the general frame of the politics

within the economic field; The main economic performance indicators specific to this function refer to the

existence of some functional and performance strategies in the fields mentioned. The strategies are efficient if they lead to the improvement of macro and microeconomic parameters.

b. of regulation and synthesis, which ensures the elaboration of the normative and institutional framework, necessary to attain the strategic objective in the public finance field, in the economic field and in the other similar fields: energy recovery and preservation, installation/equipment recuperation, materials recycling and material resources managing, reorganization and economic operators privatization which function under the authority of the Ministry of Economy and Finance;

c. of representation, by means of which it is ensured , in the name of the Romanian state and of the Romanian Government, the external and internal representation in its area of activity; the Contribution to the increase of the institution’s added value through this function and its performance could be measured through: avoidance of double taxation, by signing agreements in this respect, agreements that stipulate mutual protection of investments, the value of attracted finances and the discrepancy with the medium-term loan costs of the market, etc;

d. of applying the stipulations in the Treaty of Romania EU joining for the financial, fiscal and economic domains;

e. of elaboration and implementation of the Government’s budgetary and fiscal politics; The performance indicators of this function are: the increase of the budgetary income, the maintenance of the budgetary balance, the increase of the budgetary debt takings, etc.

f. of the correlation of the fiscal and budgetary politics with the other economic-social politics;

g. of coordination of the budgetary relations with the European Union, as well as of the contacts with the communitarian structures, from an administrative point of view;

h. of state income administration; i. of contraction and administration of public duty; j. of administration of the resources of State Treasury; k. of exercising internal public financial control; l. of ensuring the goods’ situation which are part of the state public domain; m. of elaboration and control of the accountancy legal framework; n. of coordinating the unreimbursable financial assistance which Romania was given

by the EU and by its state members; o. of coordinating the unreimbursable financial assistance which Romania received

from the EU through cohesion and structural funds. p.of financial administration of PHARE, ISPA and SAPARD funds;


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r. of state authority, which ensures the control over the unitary application and that of legal ruling observance, in its activity domain, as well as of the institution functioning which activates under its authority or is subordinated to it;

s. of authority concerning the specialty central public administration, which ensures the elaboration and implementation of politics within financial management and control systems at public institutions, as well as that of management authority in the sector operational program concerning the increase of economic competitiveness;

t. of public property administration in the field of mineral resources, energy transportation, transporting and stocking petroleum and natural gases or in other fields established by law as public goods, through economic operators functioning under the authority of the Ministry of Economy and Finance.

The principles which are at the basis of the Ministry of Economy and Finance activity are:

a. the coherence, stability and predictability in economy and public finance on medium term; this principle is found in performance indicators through macroeconomic balances, private investments level[ including the foreign ones], direct foreign investments, economic impact on the population’s living level.

b. the adaptation of the legislative framework to the EU rulings; the main performance indicator to prove the observance of this principle is the degree of integration and compatibility of the national legislation with that of EU, from December 31, when Romania joined EU.

c. the reinforcement of the institution authority- seen in the degree of takings of budget debts;

d. the improvement of public funds management; e. the transparency of the activity in all its fields of activity- supposes information of

public interest in the Official Monitor; this principle involves communication costs; f. cooperation with its social partners; g. the insurance of a competitive and predictable business environment; the consistent

application of this principle determines an important added value realized by the ministry, although it does not imply high costs.

The main indicators of performance measurement in relation with this principle are: economic private investments, direct foreign investments, the increased number of fiscal residents, different ways of increasing the capital inflow {including the transfer of Romanian citizens who are foreign residents}, the increasing number of workplaces/jobs etc.

Bibliography The Constitution of Romania Decision no. 24 from 2004 of the Romanian Parliament.


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SME’S AS A SUPPORT FACTOR FOR PROGRESS

Liviu-Cătălin MORARU Ph. D. Lecturer

Academy of Economic Studies, Bucharest Abstract. The European officials have recently identified a relatively low level of

entrepreneurship in the European countries comparing with others regions of the world. Dealing with the Lisbon objectives (for example, increasing the EU competitiveness), European’s authorities have recommended a set of economic policies in order to increase competition and stimulate entrepreneurs. Obviously, the large majority of these policies are related to SMEs, as they represent about 99% in the total of European firms. The aim of this paper is to analyze the legislation that Romanian authorities have adopted in order to meet the EU expectations in this field.

Key words: small and medium size enterprises; micro-enterprises; red tape;

competitiveness; sustaining SME’s; Law regarding SME’s. REL Classification: 18F, 7H, 20Z

1. The definition and the role of SME’s in the society The economical agents can be grouped, in the most general classification, in two big

categories: consumers and producers. The last category is represented in the economy by the companies with different juridical representation. The company represents an organization with a focus on producing goods for the market and obtaining profit.

The companies fulfill many roles in an economy: • They are the main goods producers by which the human needs are satisfied. • They support the individual capacity of buyers (and also of their well being) by

creating jobs. • They are the main “engine” of the economy, their efficiency depending on the

economy state and performances. • They substantially contribute to the society development through promotion of

the technological innovation and progress. The Romanian legislation defines the small and medium-sized enterprises (SME’s)

depending on their number of employees and on their turnover (or the annual balance sheet). The first criteria stayed the same since the Law regarding the stimulation of opening and development of the small and medium-sized enterprises (Law 396/2004) was enforced. Initially the Law 396/2004 defined the small and medium-sized enterprises as the companies that carried out the followings:

a) Had an annual medium number of employees less than 250;


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b) Had a turnover equivalent to 8 million Euros or an annual balance sheet that does not exceed in Ron 5 million Euros.

In time, the prices and productivity evolution as well as joining European Union made that the initial financial threshold to be updated, so that nowadays has the same values with the ones within the European Union. That is why; the small and medium-sized enterprises are classified depending on their annual number of employees and on their financial performances into the following categories:

a) Micro-companies: have up to 9 employees and a net turnover or own total assets up to 2 million Euros, equivalent in Ron;

b) Small companies: have from 10 to 49 employees and a net turnover or won total assets up to 10 million Euros, equivalent in Ron;

c) Medium companies: have from 50 to 249 employees and net turnover or own total assets up to 50 million Euros, equivalent in Ron.

2. The background of SME’s in European Union Since March 2000, the European leaders of the 15 state members of the European

Union, that met In Lisbon, created a Strategy which was meant that in 2010 to became “the most dynamic and competitive economy in the world based on knowledge, capable for a sustainable economic development with more and better jobs”.

But the officials of the European Union observed that citizens are more inclined to work as employees than entrepreneurs and in order to reach their objectives, specially referring to more jobs, it is needed to have more entrepreneurs than employees.

As a result, a series of other measures and specific politics were created in order to stimulate the entrepreneur spirit of Europeans.

Due to the fact that 99% of the European companies were represented by the small and medium-sized enterprises, the politics of Union for stimulation of the economy are focused, as it was expected, on those. In 2005 The European Commission adopted a series of “Modern politics for SME’s targeting the economic and employment growth”. Those politics are grouped in five large action areas as follows:

• Promote education and entrepreneurial abilities • Develop access to market for SME’s • Reduce bureaucracy • Improve the growth potential of SME’s • Improve the dialogue and consultations between SME’s and other parties

interested in the sector. The focus is on the reduction of the bureaucracy, as the polls (EC, 2007) indicates

that more than 10% from the companies with one employee (no employees) will hire more people if the bureaucracy will diminish.

As those companies represent more than 50% from the total European business, potential employment will create approximate 1.5 million jobs. Moreover, this will reduce with 25% the costs connected to bureaucracy and the companies will save this way around 150 billion Euro (around 1.5% from the Europe Gross Domestic Product).

3. SME’s in Romania The governmental strategy for sustaining the development of the small and medium-

sized enterprises reveals an important feature of SME’s in Romania: the majority of them (50,2%) develop activities within commerce, whereas the average of the Union is around 20%. If at the moment of the research the hypermarkets only arrived in Romania, their rhythm of growing in the last years (2005-2007) seriously threat the SME’s from this sector


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and it is not impossible that a recent data on this sector to reveal a even more serious decrease of SME’s coverage within the commercial sector. Dates from 2005 sustain this affirmation, the weight of SME’s coverage within the commercial sector was 41,5%.

The Governmental Strategy revealed that in 2001 the majority of SME’s from Romania, as well as those from the state members, were micro-companies and represented 91,2% from the total number of SME’s. This weight rise slowly in 2005 when from 925,692 SME’s, 867,921 were micro-companies, which is about 94%.

In order to stimulate the private initiative The Romanian Government also made a series of measures transformed into Law 346/2004 “Law regarding the stimulation for opening and development of the Small and Medium-sized Enterprises”.

In the followings we will analyze this Law in order to identify the strengths and the weaknesses of the law, and to emphasize the effects of the law over the economic performances of SME’s.

After the chapter referring to the general dispositions, the second one creates a favorable frame for setting up and development of the IMMs. Mainly is looking for simplifying the administrative procedures and preventing the unjustified increase of the costs connected to their conformity towards the enforced rules. If regarding the administrative procedures simplification creating the Single Office reduced the bureaucracy, by decreasing the number of the documents needed, also of the offices to go and also of the time for response, the costs to set up a company were not decreased. On contrary, the taxes to be paid for setting up a company were increased as those are adjusted to the rate of inflation.

The rules regarding the access to public services and assets belonging to autonomous administration, national companies and commercial companies with majority state capital were delegated to local authorities, making harder to follow how are they applied, how do they understand to respect those stipulations and how they harmonize local stipulations at the national level,

In the section three, regarding the priority access to public acquisitions of products, works and services, are mentioned the first clear measures to be taken in order to reduce costs for SME’s, those benefiting from 50% reduction on criteria based on turnover, participation guarantee and the guaranty for good execution required in public acquisitions of goods, works and services. This way, the costs for amounts immobilization are reduced, SME’s not being able to compete with big companies regarding immobilization of such large amounts of money needed for guarantees. SME’s benefit also from different information services, assistance and consultancy, mainly for free, saving this way financial and human resources

In the section regarding the activity stimulation for research-development and innovation it is stipulated that the National Agency for Small and Medium-sized Enterprises and Cooperation can propose the technological transfer, for free, to the medium and small companies, of course with respecting the law. This stipulation may be a knife with two blades because SME’s are not stimulated to develop their own departments of research-development and may tend to depend on the results of the powerful companies that invest in this field.

And in order to continue on the lack of cohesion regarding the development of the companies through knowledge, the section for professional training is very brief and does not include real stipulations so that individuals may benefit from a entrepreneurial training that will allow them to obtain specific knowledge and abilities.

Authorities had also foreseen a series of programs for development of the medium and small companies. Those are transformed into financial non-reimbursable help to complete the needed capital for initiating a business as well as to make investments into


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productive and service sector. Besides other measures to support SME’s, this chapter talks about the financing source of those programs: by the state budget law, funds in value of 0.2% from the GDP for financing programs for development and for measures of supporting new set up of companies and supporting the development of the small and medium-sized enterprises at the national and local level, stipulated by the Governmental Strategy for supporting the SME’s development, for 2004-2008.

A chapter is dedicated to the National Fund to guarantee the credits for small and medium-sized enterprises (FNGCIMM). This is created as a company on stocks which has attributions to contribute to set up and development of the companies coming to complete the financing and guarantees the credits approved by the commercial banks in the limit of a maximum 75%. But, in case the intention of the government was to help SME’s, the application of this idea is blocked by bureaucracy because the companies are required to submit two big folders, with a lot of documents. In addition, the bank that an SME’s will require a credit from has also to complete and submit a big folder which will contain identical documents with the ones provided in the two submitted by the SME’s (for example, the documents that prove that a company is a SME’s, respective Appendix 1 and 2 from GO 27/2006).

The petitioners also have to submit a declaration on their own responsibility that obliges them to provide, during the entire credit period, access to the documents and accountancy reports for the representative of FNGCIMM SA.

And as if all those mentioned above were not enough to discourage petitioners, in the conditions for eligibility there is mentioned that the petitioners has to sign “in blank in favor for the Fund, for the amount and deadline, without protest, credited by the administrators/associates/stock holders residents in Romania”.

This eligibility condition can be justified as an exceed stipulation against the bankruptcy or payment incapacity, but it is also true that authorities attitude has to be different in case they really want to encourage free initiative. For example, Leon Willink, Regional Director of Fortis recently declared regarding Holland that the value of the real estate credit is bigger than the real estate value: “There is a risk that the bank will assume….but we know that we can trust our clients from here”. An attitude that maybe will inspire the Council for Administration of the Fund.

Also, the volume of the guarantees offered by the Fund are rather modest: in 2004 they given 27 million Ron and in 2005 127 million Ron, and in 2006 412 million Ron, the value of those guarantees being rather modest (in 2004 nearly inexistent), but the rhythm of the growing creates the premises for a possible re-launching of the support given to IMMs.

Conclusions From January 1990 to December 2002 there were set up 995 542 companies, and up

to 2007 there were another 669,982 companies. On the other hand, from January 1990 to December 2002 there were terminated 181,151 companies representing 18, 2% from the total number of the companies set up in that period. During 2003-2007 there were terminated 321,783 companies which, reported to the number of the companies set up in that period, represents around 48%, and reported to the total number of the companies represents 30,2%.

It can be said that the law for set up and development of IMM “function only on half”, as individuals are encouraged to open companies, but those are not stimulated to develop their activities.

Among the possible causes of this evolution are: the red tape costs, that are still high, the authorities mentality, who are treating the small entrepreneurs like potential thieves and


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a few economic initiatives with perverse effects, that are evolving contrary to the initial goals.

A few recommendations can be made: to increase the trustiness in Romanian entrepreneurs and to settle coherent programs focused on the human factor, the main driver of the social and economic progress

The evolution of new firms

Table 1 Year No. of new firms 2000 57291 2001 61265 2002 84780 2003 123582 2004 144284 2005 157375 2006 135211 2007* 109530 Total* 1665524

* septembrie 2007

The evolution of SME’s Table 2

Year Total firms

0-9 employers

10-49 employers

50-249 employers

>250 employers Total SME’s

2002 810.084 754.248 41.059 12.322 2.455 807.629

2003 850.951 793.375 42.891 12.272 2.413 848.538

2004 901.414 841.913 44.290 12.776 2.435 898.979

2005 928.255 867.921 44.066 13.705 2.563 925.692

Year

Total active firms

0-9 employers

10-49 employers

50-249 employers

>250 employers Total SME’s

2002 315.105 274.674 30.418 8.067 1.946 313.159

2003 349.061 305.024 33.581 8.459 1.997 347.064

2004 394.519 348.881 34.823 8.840 1.974 392.544

2005 433.030 383.892 38.175 9.068 1.856 431.135 Notes 1. On February 3, 2006, Chapter I, article 4, alignment (1), modified the article I point

3 from the Ordinance 27/2006. 2. The data is taken from the Governmental Strategy for sustaining the Medium and

Small Companies development from 2004 to 2008, at the level of 2001. 3. The criteria for the number of employees was modified imposing that a company

should have at least one employee on December 31, 2003, in order to classify as micro-company and stay in that category for the income tax.

4. Fortis is a Belgium-Hooland bank,with hearquarter Bruxelles and at Utrecht, and one of the most important European financial groups, that offer bank serivicies, insurrange,


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investments and financial and broker consultaitons. With over 56,800 employees and a turnover of de angajaţi şi 4,4 miliabillion Euros, Fortis is listed on Euronext.

5. Termination represents the operation thorugh a company is eliminnated from the Commerce Register, marking this way the end of their juridical representation as a result of the company close.

Bibliography

*** “Strategia guvernamentală pentru susţinerea dezvoltării Întreprinderilor mici şi mijlocii în perioada 2004-2008”, http://www.animmc.ro/imm/strategia;

*** Legea 346/2004 - privind stimularea înfiinţării şi dezvoltării întreprinderilor mici şi mijlocii”, Monitorul Oficial nr. 681 din 29 iulie 2004

Comisia Naţională de Prognoză - Prognoza pe termen mediu 2007-2013 – varianta finală de toamnă, http://www.cnp.ro/ro/prognoze

Drăgusin, Mariana (1999), Managementul întreprinderilor comerciale mici şi mijlocii, Editura ASE, Bucuresti

Dan, Raluca, “Cum îşi iau olandezii case în rate”, Evenimentul Zilei Nr. 4996, 19 Noiembrie 2007

European Commission – DG Enterprise and Industry – “Putting SMEs First - a guide to SME policy”, 2007, http://ec.europa.eu/enterprise/sme/policy_en.htm

Institutul Naţional de Statistică – Anuarul Statistic al României 2006 Oficiul Naţional al Registrului Comerţului - Sinteza statistică a datelor din Registrul Central

al Comerţului la 30 septembrie 2007, http://www.onrc.ro Web page of Fondului naţional de garantare a creditelor pentru întreprinderile mici şi

mijlocii (FNGCIMM) : http://www.fngcimm.ro/index.php


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HUMAN RESOURCE CONTRIBUTIONS TO THE ORGANIZATIONAL STRATEGY.

THE ROMANIAN BANKING SECTOR AND THE INTEGRATION

TO THE EUROPEAN UNION

Anca BOGDAN

Candidate Ph. D. Lecturer Academy of Economic Studies, Bucharest

Abstract. The privatisation of the Romanian banking institutions was accelerated

during the EU pre-adhesion period and reached a peak in 2006 with the privatisation of the largest commercial bank. From the ownership perspective, the Romanian banking system is now dominated by foreign investors (94.5% of the banking assets). The present challenge for these banks is their integration in the international financial groups, while conserving their market share. This process takes place in the conditions of increasing competition on the national market by the entrance of new players and financial and monetary markets liberalization. A 2003 survey of the Romanian National Bank on the middle and long term evolutions of the banking sector identifies the management and the qualified personnel as the main competitive advantages of a bank. In the context of Romania’s integration to the EU structures and the markets’ internationalization, we shall analyze some of the evolution paths in the banking sector from a human resources’ perspective. Thus we shall analyze the challenges of integrating multinational and multicultural structures, adapting to new competitive conditions or entering new markets or sectors.

Key words: human capital; competence; competitiveness; banking sector; strategy. REL Classification: 14C, 17B

Particularities of the banking activities from a human resources management

perspective As compared with other fields of activity, the banking sector is distinctive by its

specific structures, well determined positions and responsibilities, as well as numerous rules and internal regulations. It is also one of the most visible branches in a market. If compared with other commercial companies, one can say that banks trade money and trust: bankers earn/buy the trust of the creditors for returning the deposits; and the clients must convince the bank that they will return the money borrowed/bought as loans. All these operations take place in a very strict legal framework and benefiting from specific confidentiality.

Banking implies managing and permanently moving large amounts of money, in larger or smaller transactions, in different money and on different continents, employing numerous people over a large network and in a large geographic area. Thus, speed and accuracy are essential in this field, as well as precision for the “banking worker”.


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The specificity of this kind of “commodities” and “trade” leaves a mark upon the forms and means of communication within and between banks: bankers, on one side, must inspire trust, seriousness and solvency, but they should also inspire respect and authority, making sure that they can recover the money landed. Image, reputation and status are very important in the banking sector. Due to all these constraints, bankers have a very restrictive even rigid code of conduct.

The banks are organizations with written and well defined sets of responsibilities. The hierarchy is very clear and the lines of command are very important. In most of cases, the banking jobs imply great responsibility and thus a great level of stress due to the personal responsibility engaged by each signature.

In the 1990s, the Romanian banks preferred the corporate clients, especially companies with important turnover. But after 2000, the trend was reversed and the banks reoriented towards retail banking, that is private clients and small companies. Nowadays, the Romanian banks reached the final phase of an exponential development. Large banks used their assets and extended networks in order to consolidate or increase their market share on all client segments and to adapt their offer to the market demands. Therefore the universal bank concept is the most popular from a strategic point of view.

In the last five years we can observe a concentration trend in the sector: the top five banks represent 59.9% in market share and 70% of the total banking profits in 2004(1). The consolidation of the leaders’ positions determined another trend in the market: the segmentation, marked by the appearance of specialized banks or smaller banks addressing special customers.

Another major trend is the orientation towards the retail banking segment, which was determined by increased market competitiveness and the erosion of the banking rates and margins offered by the market makers. This repositioning is causing changes in internal organization (as personnel structure), in network structures, in products and services offered and in communication. A direct consequence is the modernization and the “opening” of the agencies towards the customers, the increased number of financial advisors and the improvement in the service quality (flexibility, speed, simplified procedures, development of new services such as mobile banking, e-banking, call centres).

From the customers’ perspective, the main selection criterion for the bank is the trust. A 2005 survey(2) reveals the following criteria used by the banking customers: nice and friendly environment in the agencies, complete and correct information on the products and their cost, personnel’s competence, speedy and simple operations, use of modern technology in specific operations, schedule adapted to customers’ needs, interest rates, small commissions.

The criteria above derive from a series of competencies in the field of human resources and organization, very important in assessing the quality of customers’ service. The results of the survey among banking customers are confirmed by another survey, operated by the Romanian National Bank (BNR) among the players in the banking sector.

The 2003 BNR survey(1) on the evolution of the banking sector shows that 65% of the players in the sector – banks’ representatives and financial consultants – consider three risk categories as very important: management risk, market concentration and over-population. Thus, management and ownership become success factors in the business of banking.

The same survey identifies as most important competitive advantages of the bank it’s management and it’s qualified personnel, both on a short and medium term. These two factors were nominated as being decisive by 89% of the respondents.

Since all the competitors in the same category have similar technical capabilities and are basically capable of offering similar products and services, they will be differentiated by the human resources they employ. The importance of the HR function in the banking


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business is reflected by the unprecedented development of training and development programmes within the banks.

The banking carriers usually start in the sales positions in the front office or in the credits departments. Promotion criteria are based upon performance, results and competencies developed. The main qualities of an employee are responsibility, involvement, organization, client-orientation, analysis and synthesis capacities, and performance-drive.

Since the larger players absorbed earlier institutions, professional training became a priority for the HR departments. As far as the entry-levels are concerned, the training will form/consolidate the basic banking skills and develop communication skills for a better interaction with the customers. For the management positions, training is used for developing managerial competencies. In these cases training takes place within in-house sessions or specialized external programs (master or MBA programs, both national and international).

For the moment, the banking networks and HR training programs are developing in an extensive way. The main players count almost 50,000 employees. Professional development is operated through vertical (hierarchic) or horizontal development programmes. Horizontal professional development is usually carried out through training sessions and programmes, materials and information brochures, accessible through organizational intranet and internal publications.

A useful and common tool in training and motivating employees are the programmes organized abroad, practiced especially by the organizations with foreign capital. Another motivation factor is the banking careers management, assuring a promotion path towards the central services. It is very common within banks and financial institutions to encourage internal recruitment, which is another motivational factor.

Our study is structured in two parts: the presentation of the evolution of the Romanian banking sector and the identification of the influence factors over the HRM, and the main strategic paths in developing HRM in banks. The analysis of the influence factors will focus especially on the retail banking segment, one of the sources of development of the banking activities.

Major trends in the evolution of the Romanian banking system Lately, the Romanian business environment had a positive evolution, favourable to

the development of the banking sector. The main macroeconomic influence factors on the influence of the banking system are: macroeconomic indicators’ evolution (especially economic growth, inflation rate, unemployment rate and budget deficit), evolution of interest rates, demographic trends, tax policies, savings behaviour of the population, competition in the banking sector.

The evolution of the main aggregate indexes is presented in the table hereafter.

Macroeconomic indexes 2001 - 2006 Table 1

Year Indexes 2001 2002 2003 2004 2005 2006

GDP Economic growth 4,5% 5% 5,3% 5,5% 5,1% 5,2% Inflation 29% 22% 15% 9% 7% 4% Unemployment rate 9,9% 9,2% 8,9% 8,6% 8,4% 7,9% Budget deficit 4% 3,5% 3% 3% 3% 3%

Source: Romanian Government – Pre-Adhesion economic planning, 2003, National Statistics Institute.


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Interest rates reduced since 2001, with a more accelerated trend in 2004-2005. The trend in decreasing interest rates, both active and passive, is constant and will even accentuate in the following years, due to the target inflation rate estimated.

Demographic trends. According to the National Statistics Institute, the aggregate employment rate is relatively linear during the period analyzed (42,9% in 2006), with a slight growing trend of the active population (approximately 0,5% yearly).

Traditionally, the private customers are segmented using the age criterion, thus resulting four categories, as follows:

- 14 - 20 years old, - 21 - 35 years old, - 36 - 55 years old, - over 56 years old. The graphic hereafter presents the demographic evolution of the target customers of

banks in the period 2000-2005. By analyzing the potential of the banking target groups (ages between 14-20 years,

respectively 21-35 years), we notice a descending trend, determined by the decreasing population (during the last twenty years, the births number was constantly decreasing and the trend is even more accentuated due to migratory waves after the implementation of the free persons circulation).

Source: Statistic bulletins – National Statistics Institute. Figure 1. Demographic evolution of the target groups for the banking business

between 2000 - 2005 Taxation policy on revenues of the private persons has major influence on savings

behaviour. The 2004 changes in the Tax Law determined a series of changes in the taxation of the global revenues of the population, which conducted to an increase of the net revenues and to a change in the population’s savings and consumption behaviour. Consequently, there was an increased demand for specific banking products and services.

The need for adequate living conditions in later stages of the life, reflected in alternate pension products, will impact greatly the banking sector and will determine an increased demand for specific products such as complementary pensions for most of the active population.

As far as the taxation for small and medium enterprises is concerned, the Romanian Government plans to initiate actions for decreasing the costs for a creating a job in order to decrease illegal work and to stimulate the development of SMEs. This will be another

Target groups potential (thousands of persons)

2.37

4

2.36

1

2.34

6

2.34

8

2.38

5

2.32

6

5.47

0

5.60

6

5.73

8

5.80

3

5.58

5

5.47

4

5.82

3

5.83

5

5.87

0

6.14

5

6.26

2

5.28

3

5.49

3

5.71

8

5.95

9

6.20

5

6.50

7

5.78

8

0

1.000

2.000

3.000

4.000

5.000

6.000

7.000

2000 2001 2002 2003 2004 2005

14 - 20 years 21 - 35 years 36 - 55 years over 56 years


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development path for banking products and services and will determine an increased competition in the sector.

The savings of the population decreased in real numbers between 1999 – 2001. During this time, the population preferred saving in foreign currency. This is still a trend on the short term, but on a medium term there will be a reorientation towards the national currency.

Although by the end of 2005 the real passive interest rates were negative, the population continued to save money, its behaviour even progressed by comparison with the previous year (by 3%, according to the BNR estimates).

The competition between banks will intensify during the next few years in all the fields and on all customers segments. The banks try to attract customers with medium and high financial potential by offering a large scale of financial products (banking products, insurance products, consumption credits offered through commercial networks, leasing products etc.). In these cases, the banks will not only compete against each other, but also against other financial institutions from outside the system.

The development of the insurance market, of the connected financial products and services (leasing, factoring, etc.) and the development of the stock exchange will be a competition factor for the traditional banks.

Evolutions and trends in the banking sector From the banking assets perspective, the analysis of the banking sector shows that the

number of players on the market is too large: the top 20 banks own 95% of the assets in the system. Consequently, there were and still will be a series of mergers and acquisitions that will help consolidate their positions on the market.

In 2005 the privatization process continued and it resulted in an increase of the banking assets with majority private ownership. Thus, after the privatization of BCR, the majority private owned banks reached a 94.5% in market share of banks active on the Romanian market. According to the estimates of the BNR, by the end of the privatization process stipulated in the pre-adhesion programme for the last large bank in the system, CEC, the above mentioned market share will reach 95%.

During the last 18 months of the period analyzed, the banking business had a favourable evolution, especially in the credits segment. This trend was registered both for the corporate banking segment and for the retail banking, the fastest to expand.

The growth of the retail banking segment is favoured by a strong demand from the population, not affected by the tighter prudential rules concerning the debt ratio for private persons. This trend is sustained by a cheaper credit offer due to the gradual reduction of the average interest rates both on national and international currencies. In 2005, the most important type of credits in the retail segment was the consumption credit, weighing approximately 75% of the retail portfolio of the Romanian banks.

The corporate banking segment is also growing with approximately 30% quarterly in the field of credits. The stimulus of this trend is the long term loan. Due to a great need of invest-ments in the national economy in order to adapt to the European business environment during the convergence process, we can estimate that this trend will last on the long term and the average reimbursement periods will become longer in order to match the engagements taken.

The market growth and the increased competition also caused an erosion of the banking profits and a decline of their efficiency ratios. While the global assets progressed with more than 40% and the owned liabilities with more than 30%, the efficiency ratio for the aggregate assets is 2% in 2005 and the ratio for owned liabilities was 16.7%, according to the BNR statistics.

Under these same conditions of smaller gap between active and passive interest rates, the profit margins will continue to erode on the short term. Consequently, the banks will try to preserve their profits by extending their offer of products and services. Another trend in


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the financial markets across the world is the priority given to commission generating operations, as opposite to the current practice in Romanian banks of favouring revenues from interest. An alternate way of conserving profits is by better managing the costs which reflects in outsourcing activities with no direct connection to the banking business and in restructuring personnel expenses by introducing performance criteria in the assessment and compensation systems.

Challenges for the evolution of the retail banking segment The market studies concerning the banking business and international practice show

some trends in the development of the retail banking segment in Romania, as follows: a. Specialized technology will be a strategic factor in the competition for market shares:

technological evolution will impact banks’ development. Technical and informational capabilities in collecting and processing data and operations will induce a cost and time reduction and will become a decisive strategic advantage in gaining market segments and attracting customers. A non identification of this challenge will equal a major strategic risk for banks.

b. Banks must discover their customers: in order to propose adequate products and services, banks must acknowledge the needs of their customers communicate with the clients by efficient systems and based upon well organized and segmented data bases. Therefore customers can be approached in a differentiated way, according to their profitability for the bank.

c. Diversify the distribution channels: internet and mobile phones are very popular and allow opening new distribution channels for banking products. Customers will be able to select a personalized distribution channel according to their current financial needs: specialized one-to-one financial consulting at the agencies for complex products (credits, savings plans, pension plans, life insurance etc.), on one hand, and banking information by phone or internet (information on the account, balance, standard products etc.). Although multi-channel banking will become a standard service, traditional agencies will not disappear.

d. Diversify the products (individual products vs. standard products): the requests of the banking customers will become individualized and their exigencies regarding the quality of the products will increase. The retail banks should offer both adequate standard products and connected services (insurance, stock exchange access, investment funds etc.). For the customers with no financial potential, banks should offer simple and inexpensive products from the perspective of costs for processing and distributing. On the other hand, banks should offer individual solutions for complex financial problems.

e. Maintain a direct contact with the customer and assure one-to-one counselling become one of the success keys for banks. Financial institutions having qualified, efficient and active personnel have the best results in the market. Of course, personnel costs will increase, namely the training and permanent learning costs. On the other hand, continuous improvement becomes an individual responsibility for the employees in order to secure their job.

f. Simplify: processing data will be standardized, simple, without useless intermediary steps, which should result in increased transparency and reduced bureaucracy for the bank. This would also mean a better capability of adaptation to the market’s demands and an important cost cut. The simpler the structure, the les inexpensive and more adaptive it becomes.

g. Organize: leaner hierarchies, decentralized decision systems and use of employees’ potential become important in banks’ HR strategies. Speedy operations are obtained through responsibility delegation on each hierarchic level, and they help having a prompt reaction to market changes and maintaining the market shares. Compensation systems based upon financial performance help maintaining the position on the long term.


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The human resources contributions to formulating and implementing organizational strategy

The HR function contributions to strategy implementation are perceived differently from one organization to another. Processes such as performance appraisal, recruitment, professional training and compensation allow implementing strategy on a managerial level. The classical approach places HR function’s role in the area of strategy implementation, but in the new competitive environment HR becomes one of strategy’s fundamentals. These processes become strategic due to the freedom of movement of people and capital in the European area, which assures attracting, developing and preserving human resources within the organization.

Banking HR function plays an important role in the adaptation to market’s evolutions, especially in the field of competence development (Greer, 2001, Deij, Bădescu, 2004). Banks invest in training and professional development: through the Romanian Banking Institute for forming the basic banking competencies, and through their own training capacities for developing specific competencies (up to 70-80% from the yearly training budget). In house training becomes a source of competitive advantage, allowing a fast adaptation to market changes and to the customers’ needs.

In the context of increased competition both on the internal and European markets a qualified banking personnel is very important in monitoring market trends. The HR department can contribute also in the field of competitive intelligence: they are aware of personnel movements in competing institutions, the level and the trends in compensation systems in the system, and even data on hierarchy, internal organization and great strategic reorientation of rival banks.

In the case of banks integrating larger multinational financial groups supposes a modernization of the HR management function, closely coordinated to the technical and organization functions. These are support activities for the banking business, supplying support services for market segments and customer categories in order to efficiently implement strategic objectives of the bank (assuring value-added steps in the processing phase, shorter decision process, leaner hierarchy etc.) and by doing so, also reduce risk (based upon the systemic control, succeeding checks principles etc.).

Strategic development of the banks unfolds on four closely linked dimensions: structure organization/network, banking process organization, IT and technology, human resources.

Structure organization (network and central services organization) for the pre-privatisation and pre-restructuring Romanian banks was mainly product-oriented. This type of organization is specific to the banking organization theory in the 1970s but may induce problems on a free market, where the customer can freely compare and chose adapted products and services. In such markets, customer relationship management becomes a decisive success factor. Product-oriented banking structures cause fragmentation in the customer relationship, which doesn’t allow a comprehensive approach to his needs and an efficient cross selling.

In order to obtain a medium term competitive advantage, banks repositioned and restructured in order to address customer segments (in the central services, regional/departmental units and agencies). This new organization has some administrative and strategic advantages: the changes and the trends in the market are observed earlier, the structure is flexible enough to adapt immediately the products and services to new market’s demands, and the hierarchy is more durable because of its flexibility.

Besides a change in the internal procedures, a customer oriented business determines a deep structural analysis of the network in order to gain process efficiency and cut costs (especially back-office generated costs). Excessive administrative and personnel expenses in the back-office activities can be reduced by centralizing these activities in local or regional processing units. From the Romanian experience of the privatized banks or banks to be


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privatized (especially the CEC), territorial network was not established based upon market potential or geographic specificity. Therefore, the economic solution for an effective use of the market’s potential would be differentiating the network units based upon this potential and the customer types found. This action will result in empowering bank agencies in active sales centres/profit centres for financial and banking products.

Business Process Reengineering: banking processes standardization is a condition for obtaining higher processing effectiveness in order to have comparable quality services throughout the entire network, to be able to establish the workload and o determine the recruitment needs.

IT function is one of the major risks fields in the banking system. In the context of electronic dealings development, there is a need to assure standardized, quality and secure banking services throughout the entire network. IT and technical development is vital for developing specialized integrated systems and consolidating the network. Technical progress should be supported by adequate personnel training in order to have an efficient use of software applications.

HR function: HR quality and performance are decisive for implementing development strategies and for assuring banks’ long-term success. The HR function contributes in four major directions:

- assure strategically adequate middle-management staffing, - assuring quality selling personnel throughout the entire network, - assuring the specialists needed in throughout the network and in the central

structures, - increasing work productivity. Assuring strategically adequate middle-management is decisive for implementing

strategy within the organization. By comparison to international banks, local banks suffered until recently from deficiencies in formulating and/or clearly communicating the personnel strategy, mostly authoritarian management style, ad-hoc decision style, and bureaucratic problem-solving system for current problems, tendency of avoiding personal responsibility and depersonalization of the decision process by deciding collectively (e.g. decision committees and commissions), as well as from frequent and excessive control systems. In time, this management style created a middle-management that was afraid and not trusting the organizational change and that was unqualified for the position because of the lack of management training. Nowadays, an adequate management style is essential for implementing strategy successfully. This modern management style should comprehend teamwork, goal and performance-oriented management teams (e.g. using management by objectives techniques), effective project management, and competence and responsibility delegation and decentralizing (Radu, 2005).

A transparent, constant, standardized and performance-oriented recruitment and assessment system for the management will reduce the risk of hiring unsuited personnel and staffs the organization with effective personnel on the long term.

The network sales personnel have to manage actively the market’s potential and the customers in order to maximize the bank’s profits. An active approach of the market by exploring the cross-selling reserves, formatting and permanently monitoring the sales plan assures a successful network management. In order to acquire qualified network personnel, there following steps should be taken: assessing personnel based upon their selling and communication skills, implementing special sales training sessions, attracting experienced sales persons from outside the organization, monitoring the sales.

New banking activities require qualified personnel. Part of the skills necessary can be acquired by special in-house trainings, in case there are experienced internal resources. Otherwise, the training programs may be carried out in partnership with external trainers, foreign specialists with extensive experience in the field of retail banking. This approach assures an up-to-date know-how infusion in the local training system.


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Work productivity, determined as earnings per employee, is still low, according to the BNR aggregate analysis. Even if the Romanian business environment is not yet compatible with the EU business environment, banks have a priority in improving this ratio in order to face competition on the long term.

View these trends, it is necessary to resize personnel in administrative positions in order to reach an optimum 30:70 in the relation between administration personnel (including back-office, accounting etc.) and front-office.

Strategic paths in developing human resources management in the banking

system As far as implementing HR strategy is concerned we shall consider five possible

paths (Dumont, 2002, Klarsfeld, Oiry, 2003, Peretti, 2005): - recruiting and preserving personnel, - integrating HR to organizational strategy, - improving the quality of the customer services, - implementing a continuous learning system within the organization, - adapting fast to the strategic evolutions of the organization. All these objectives are common to all organizations and in all countries, but their

importance is variable. Their weigh in the organization/national economy determines the uniqueness of the respective organization/country.

Recruiting and preserving the human resources is a priority for all Romanian banks because of the lack of qualified personnel, adapted to their needs (Dumont, 2002). This difficulty determines the banks to promote training policies that encourage skills development in-house and preserving the trained staff. This trend is very important since there is a penury of qualified work force in the market, aggravated by an increased professional mobility which was favoured by the availability of workplaces and by the greater negotiation power of the specialists.

Integrating human resources to organizational strategies implies stimulating the adaptability of all employees to the dynamic organizational conditions and the dynamics of developing individual competencies. This trend is perceived at different intensities in all countries and is determined by increased internal and external competition, generalized use of IT&C and by the globalization of trade etc. In this context, banks have to integrate HR to their strategy as a differentiating factor from their competitors.

Improving the quality of customer service is one of the ways of adapting contemporary organizations to the competitive business environment. From a HR perspective, implementing quality management systems ant the client orientation are realized by introducing or adapting the performance assessment system and implementing an adequate training programme for improving the quality of customer relationship (Beardwell, Holden, Claydon, 2004).

Implementing a continuous learning system within the organization is a viable way of responding to the quality requirement of the market. A great number of organizations choose to implement a quality management system (according to the ISO standards), impacting the human resources. The 2001 version of the ISO 9001 standard contains a chapter dedicated to the resources management. Within this chapter, the human resources have the central place, especially the competencies and the professional training.

This quality assurance approach by a continuous development determines changes in the organization of activities, conducting to the so-called “intelligent organizations”. Intelligent organizations are different from the classical ones on two levels (Kurokawa, 2005):

- on an organizational level, they reach the total quality goal by satisfying the partners – customers, owners, employees etc.

- on an individual level, they allow interconnecting knowledge and individual competencies and cooperating between people.


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This type of approach is typical for German and Austrian organizations and is reflected by increased organizational efficiency, adequate sizing and use of resources and employee and partners’ involvement in the continuous learning process.

The fast adaptation to the strategic evolutions of the organization is necessary in the context of radical change, when there is a need of rapidly changing mentalities, traditional models and current practices. Therefore, it is necessary to identify tools for involving all the employees, both on organizational and individual levels, in making change possible. This dynamism translates into a permanent adaptation to the market, developments of the initial projects, mergers and acquisitions, phenomena common to the Spanish market (Dumont, 2002, p. 56).

Notes

(1) According to the 2004 annual reports, cited in "Liderii bancari încep să audă alergătorii din plutonul doi" (Top bankers begin seeing the challengers) – O. Osman în Capital, nr 19, 12 mai 2005, p. 13

(2) Daedalus Consulting survey on a 985 respondents panel, formed from urban banking customers, cited in “Clienţii şi-au ales instituţia bancară preferată” (Customers chose their favourite bank) – G. Ţinteanu Moldoveanu în Capital, nr. 15, 14 aprilie 2005, p. 74

(3) Survey on a 46 panel of financial institutions and banks (commercial banks, investment banks, National Bank of Romania, financial consulting firms) on the development stage of the Romanian banking system and on its medium term evolution perspectives.

Bibliography

Beardwell, I., Holden, L., Claydon, T. (2004). Human Resource Management. A Contem-porary Approach, 4th ed., Prentice Hall, Harlow UK

Costin, A.E., Malvache, J.L., Popa, M. (2002). Analiza pieţei muncii şi identificarea necesa-rului de formare, CNFPA, Bucureşti

Deij, A., Bădescu, M. (2004). Review of Progress in Vocational Education and Training Reform in Romania, European Training Foundation, Torino

Dumont, A. (coord.) (2002). Objectif compétences. Des pratiques européennes innovantes, Tome 1, MEDEF, Paris

Greer, C.R. (2001). Strategic Human Resource Management, 2nd ed., Prentice Hall, New Jersey Klarsfeld, A., Oiry, E. (2003). Gérer les compétences, Editions Vuibert AGRH, Paris, pp. 33-53 Kurokawa, T., „Preparing Human Resources for International Standards” în Science &

Technology Trends Quaterly Review, No 17, October, 2005, pp. 34-47 Lynch, R. (2002). Strategie corporativă, Central European University, Editura Arc, Chişinău Peretti, J.M. (2005). Gestion des ressources humaines, 12e éd., Editions Vuibert, Paris Porter, M. (2001). Avantajul concurenţial, Editura Teora, Bucureşti Radu, R., „Impactul privatizărilor asupra serviciilor bancare”, în Piaţa Financiară, Nr. 11,

Noiembrie, 2005, p. 44 *** (2003) Rezultatele sondajului privind evoluţia sistemului bancar din România, Banca

Naţională a României, Bucureşti *** Buletin statistic, 2002-2005, Institutul Naţional de Statistică


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THE EFFECTS OF MONETARY POLICY UPON THE REAL ECONOMY

Anca Maria GHERMAN Assistant Professor

Academy of Economic Studies, Bucharest Abstract. The monetary policy decisions are transmitted in the economy in different

ways, all influencing in the end the evolution of prices and output. The question “If, and if so, how does the monetary policy affect the real economy?” is

a perpetual one. The difficulty in answering it is owed to the direction of the causality: the monetary policy and various financial variables affect and are at the same time affected by the changes in the real economy.

The monetary policy leads to strong, rapid and generalized effects over variables such as price and output. The effects of the monetary policy on output appear with a certain time delay and their consequences are felt on a relatively short run. After a prolonged period, prices reestablish the market equilibrium, by bringing back output to the initial level. These approaches imply the existence of the neutrality of money on the long run, but not of their neutrality on the short run.

Key words: real economy; transmission mechanisms; macroeconomic disequilibria;

GDP; money neutrality.

The transmission mechanisms represent a combination of all economic channels

through which, during the years, the monetary policy affects real economy. The monetary policy is mostly an action instrument of decision factors of the last

years, especially in the developed states, along with the formulated objections and the limitation of the financial policy. The financial policy is avoided especially because of the following inconveniences:

• The extended amount of time granted to make a change (usually a budgetary year); • The focalized and sectorial feature of this kind of policy, which makes it vulnerable

to the criticisms of the free trade partisans Although the monetary policy is an important and useful element in an operative

economy it also has unexpected or unwanted consequences. For the countries going through transition the monetary policy is essential in adjusting the unbalance of the economy, mostly in managing the inflationist gaps and the current account deficit, an important role is being played by monetary policy related to the economic growth. Taking in consideration these unbalances, impossible to solve by the market mechanism, the implication of the state institutions is opportune and necessary through active and correlated measures. The monetary policy leads to strong, fast and global effects upon variables such as prices and output, those being actually the main objectives of this kind of action. Many economists agree with the fact that the effects of the monetary policies upon the output appear after a period of time and they represent short run effects; the output comes back to the natural


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standards on the long run. All in all, on the short run the fluctuations in the currency amount leads to output fluctuation and only after a long period of time the prices establish the balance on the market, bringing the output to the initial level. These approaches involve the existence of a currency neutrality only on the long run.

Macroeconomics has always generated strong controversial discussions.Those

debates created the idea that two different groups with no common principle are claming macroeconomics.

The recent researches invalidate this idea. At the time being, it’s considered that the main principles causing minimum disagreements can become the center of macroeconomics not only with theoretical, but also with practical relevance.

The first principle points out the fact that the GDP fluctuates round a growing trend in most of economies. The ascending trend is mostly determined by the aggregate supply of an economy. The fluctuations of the real GDP are caused by the changes of the aggregate demand.

The second principle doesn’t agree with the existence of a long run compromise between the inflation and unemployment.

The consequence of this principle is that the increase in currency amount is reflected, on the long run, only in the inflation growth without any effects upon the decreasing of the unemployment rate. This second principle goes along with the idea that the Central Bank has to assume and follow on a regular basis the process of achieving the inflation target on the long term.

The third principle agrees with the short-term compromise between inflation and unemployment, based on no nominal flexibility and also on the prices information asymmetry.

The fourth principle admits that anticipations represent the macroeconomic policy element. The anticipations react to the macroeconomic changes and affect the outcome of it. The principle also outlines the important role of credibility. If the monetary policy is credible then the short term cost of targeting inflation is lower.

The fifth principle recommends merging macroeconomic policies in a systematic process based more on rules than discretionary thinking. In uncertain circumstances, the rules tend to represent useful macroeconomic guide marks.


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All these principles are answering to the following question: ‘Should the monetary policy objectives include real economic variables or should they limit to the nominal economic variables?’ The arguments that support real economic variables can be systematized in two categories:

• The first one includes politic arguments that demonstrate that in a democratic society, the Central Bank should assume responsibilities concerning the real economy variables.

• The second category is reluctant to the long term combination between the real and the nominal economic variables. The power of these arguments is faded by the monetary source of inflation.

The principles contributed to the consolidation of the idea that the Central Bank must assure a balanced, reliable and predictable dynamic of nominal economy. Considering this point of view, the real economic variables are economic indicators with an informative role.

A monetary policy change and its effect is reflected upon the output through a

structural model which describes the economic system and the connection between different variables at micro and macro economic level and also reveals the related equations.

A simplified model will analyze if a monetary policy fluctuation is correlated with an output fluctuation and if it’s by chance or is a real systematic and obvious connection during a limited period of time.

In the latest debates, both points of view are reflected: a quasi-general agreement does exist regarding the long run monetary neutrality and on the short run there are some theories supporting the prices rigidity which means non- neutrality of the monetary policy, whereas the second one supports also the money neutrality on the short run.


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Bibliography

Begg, D., Capital inflows, monetary policy and the exchange rate regime Cozmâncă, B.O. (2002), Mecanisme de transmisie a politicii monetare Dardac, N., Vascu, T., Moneda – Credit, editura ASE 2002 Dăianu, D., Vrânceanu, R., Romania knocks at the EU door. How to better its monetary and

exchange rate mechanisms?, studiu Edwards, S., Exchange rate systems in emerging economies Fackler, J., Filer, L., Kim, Y., Exchange Rate Targeting and Economic Stabilisation; An

Empirical Exploration, october 2003 Friedman, B.M., Does monetary policy affect real economic activity? : Why do we still ask

this question? august 1995 Isărescu, M., Croitoru, L., Târhoacă, C., Politica monetară, inflaţia şi sectorul real, studiu Mishkin, F.S., Symposium on the Monetary Transmission Mechanism, The Journal of

Economic Perspectives, Vol. 9, No. 4 Mishkin, F.S., The channels of monetary transmission: lessons for monetary policy,

februarie 1996 Romer, C.D., Romer, D.H., Goldfeld, S.M., Friedman, B. M. New Evidence on the Monetary

Transmission Mechanism, Brookings Papers on Economic Activity, Vol 1990, No.1


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MARKETING AND SUSTAINABLE TOURISM

Silvia MUHCINĂ Ph.D. Senior Lecturer

“Ovidius” University, Constanta Abstract. Among others, tourism marketing has the purpose to facilitate the process

of conceiving and developing those specific tourism products, which better corresponding to different tourists categories’ needs. These products are created going from utilization of some natural and human resources, considered as tourism attraction. In the sustainable development spirit, marketers must conceive harmonious tourism product policies; as to satisfy the actual tourists’ needs and future tourists generation’ needs also, by using the natural environment elements in an equilibrated way.

Key words: tourism; marketing; sustainable.

REL Classification: 14.G.

According to sustainable development principles, the human progress on entire planet

and for a long time is assured by economy and environment reconciliation. The specialists in social and economic sciences consider that the sustainable

development combines, in a superior synthesis, the sustainable economic growth, keeping and ameliorate the environment health, social justice and democratic environment assuring in social life (Catedra de Economie şi Politici Economice, 2000, pp. 474).

Sustainable development for business means “adopting business strategies and activities that meet the needs of the enterprise and its stakeholders today while protecting, sustaining and enhancing the human and natural resources that will be needed in the future” (International Institute for Sustainable Development, 1994).

The sustainable business supposes interdependences between economic, environmental, and social objectives and understands that long-term viability depends on integrating all three objectives in decision-making.

Rather than regarding social and environmental objectives as costs, a sustainable enterprise seeks opportunities for profit in achieving these goals (IISD, 1994).

1. Tourism and sustainable development Between the economic activities that have a strong environmental impact, is tourism

activity, because tourism is an intense user of natural resources in the process of tourism products creation and in the realization process of the complex tourism offer.

Through there specify, tourism activities generate some positive or negative impact forms on the environment, such as (Nistoreanu, etal, 2003, pp.34-39):

- Political and natural environmental impact (determined by the governments’ position concerning tourism policy and rational utilization of natural resources);

- Social impact (the tourism influence on the local population’ life from tourism destination’ zones, on there’s social structure and professional life);

- Economic impact (the local and regional development through the aspect of economic resources, the economic impact being materialized in tourism expenses’ volume);

- Cultural impact (dominated by tourists and local people relation, the natives spiritual life’ influence);


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- Tourism impact (the way that tourism activities them-selves determines environmental and tourism resources’ modifications).

The tourism’ effects analyze on the environment and peoples life guided the necessity of formulation, application and appropriate the sustainable tourism concept.

The tourism industry accepted the sustainable tourism concept and adopted the sustainable tourism terms, considering that sustainable tourism is developing the idea of satisfying actual tourists and tourism industry’s needs and, in the same time, protecting the environment and future opportunities. The sustainable tourism is considered the promoter of all kind of resources management as to satisfy the economical, social and esthetic needs by cultural integrity, essential ecological process, biological diversity and life support systems keeping process (WTO, 1988).

The sustainable principles application in tourism suppose some specific tourism activities, operations, institutions and projects (Nistoreanu, C., etal., 2003, pp. 16).

Going from sustainable tourism concept development process and considering the experience of some countries that already applied this concept, some sustainable development principles have been enounced, like:

- The value of natural environment for tourism is very high and the next generation must enjoy this value too;

- The tourism must be seen as a positive activity, the environment, the local communities and the visitors must benefit of this activity;

- The tourism-environment relation must be developed as to sustain tourism activity on long-term, on its turn, the tourism activity development must not affects the environment in a negative way;

- The tourism activity must be developed respecting the ecological, social, economical and cultural characteristics of tourism destination’s place;

- The tourism development process’ goals must always be to balance tourists and also, there hosts’ needs;

- The tourism industry, environmental organization of the governments and international organizations must respects these principles and must cooperate as to practice them (Stănciulescu, etal, 2000, pp. 5).

Going from those principles, it can be understood that appropriation of the sustainable tourism concept its necessary because the tourism activity must represent a chance for economy and not a risk for society.

2. Marketing and sustainable tourism Economic sector, tourism and travel business is a complex and voluntary mixture

between different tourism services suppliers and travel agencies that acts such intermediaries between the public and tourism products.

The tourism products are made going from some specify resources, natural environment elements (mountains, sea, rivers, forests etc.) and some result of human life and activities (human habitats, buildings, castles, museums etc.), considered as tourism attraction.

Going from this aspect, it can very simply say that tourism marketing is basically about selling the right products at the right price as to carefully targeted people, using the best possible and most appropriate methods.

The tourism phenomenon complexity and the particularly aspects of tourism organization activity, involves a special vision in marketing approach. Because of its specificity, determinate by the interaction of its material, natural and human’s creations structure and some specifically services, the tourism activities are joint parts of a homogeny assembly.

The tourism marketing strategies applied by every participant on that activity must be coordinated with tourism policy, such as to become a sustainable development support. The tourism firm use these natural resources patrimony or human’s creations results considered as tourism attractions patrimony as to satisfy the consumers’ needs and to appropriate the profit.

Marketing must and can help to transpose in to practice the sustainable tourism principles. Through marketing activities, the tourism organizations can influence tourists’


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behavior and associate the demand for different types of tourism and tourism products. The goals proposed by tourism firms can be achieved by generating more information about sustainable tourism products and directing these information to the tourists key-targets, offering them those tourism services and products that maximize the benefits and minimize the negative impact on local communities and their environment.

2.1. Tourism marketing’s role There are several reasons why marketing is an important functional area to achieve

the sustainable tourism principles. So, the tourism marketing application’ process is important because the fallowing aspects:

- Marketing strategies can provide a coordinating framework in which the tourism firms’ action and the interests of local communities from the tourism destinations are lead in the same direction, in a common action framework;

- Marketing management holds the most efficient tools to understand and influence the tourists behavior, and, in the same time, the most appropriate techniques to design and delivery those tourism products that have the quality that allow to consider the tourism destination such as a local sustainable environment;

- Marketing management can allow to target, involve and collaborate with local communities elected representatives and the exponents of these local communities as to achieve together the sustainable tourism’ objectives (Middleton and Hawkins, 1998, pp. 10).

Like in any other type of activities, the sustainable tourism marketing orientation must consider on tourism firm’ level, tourism sector and also economic life, some aspects such as:

- Analyzing actually performance of the firm, reporting to the environment; - Elaborating a new environment policy, with realistic objectives and an action program; - Obtaining all new information about the law modification witch can influence their activity; - Investing in education and training for their employees about non-pollution

technologies and about care for environment; - Creating a good collaboration with their suppliers and clients to be more carefully

as to increase the health’s environment; - Cooperating with different organizations and implicating in environmental

protection programs; - Creating links between local, zonal, central authorities as to have a unitary

approach for environment policy and measures; - Making theirs development activity only by preserving the nature, the cultural local

patrimony, the quantity and quality of natural resources; - Educating the tourists in the spirit of environmental care and, more than that,

refusing those tourists that can harm the environment or degreasing their number by some certain measures (mostly of price levels) etc.

2.2. Tourism marketing application’s levels Because of its specificity, the tourism product containing a material structure and,

some specifically services activities, the tourism activities are unitary components of a homogeneous assembly.

More economic organizations participate to the tourism product realization process: - Basic tourism services’ suppliers (hotels agents, caterers, transporters etc.; - Tour-operators; - Travel agencies, - Other supplementary or auxiliary services’ suppliers. Every organization fallows to achieve its own marketing objectives, profit objectives

and satisfying its tourists products and services demand. On the other hand, all economic organizations’ effort must be coordinated in such a

way as to maximize the economic results on all services supplying chain.


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Every of these composing elements describe own’ market and, in the same time, its own answer to a specific demand. On the other hand, the tourism global product is there’s interaction’ results, responding to an assembly tourism demand.

That’s why, the micro-marketing tourism’ approach fallows the optimization of every tourist firm activity and a good coordination of all tourism services suppliers, tour-operators and travel agencies’ efforts.

But the tourism activities are unfolded on the communities that are living on the tourism destinations’ framework. These communities’ representatives take some decisions that, through there’s’ contents, are stimulating or are stumbling the tourism development, going from communities members interest watching the economic and social life or the environment’ integrity

In the same time, the tourism activity is affected through some effects generated through high levels’ decisions making process. These decisions, through there strategic importance and tactical instruments of appliance, can affect the tourism firm’ strategy (custom policy, investment policy, environment protection’ policy etc.).

That’s why, the tourism macro-marketing approach can assure a more good correlation between tourism and other economically sectors and to increase the responsibility to society and environment and, by adequate measure, tourism policy must become a sustainable development support.

By some particularly aspects, the tourism activities are based, on naturally and cultural patrimony and has different effects –in space and time- on the entire environment.

The marketing policy ground’ process must by realize in such a way to assure –on one hand- the tourism firm’ profit and the tourists needs’ satisfaction and –on the other hand- the sustainable development of the local communities and the zones that are considered as tourism destinations, through long term quality and quantity environment’ preservation.

That’s why, through tourism marketing it’s possible configuring specify methods and instruments that can be used to increase the profits’ firm, the tourists’ satisfaction and, in the same time the means to harmonize the tourism firms’ marketing policies with the economic policy of a country, in natural patrimony preservation and consolidation conditions.

2.3. Organizations with responsibilities in sustainable tourism marketing In practice, on different levels, there are many organizations, as well economic as non-

profit organizations, which can have specific attributes and responsibilities in sustainable tourism marketing (especially in case of a destination offered as a tourism product), such as:

a. On central level, national organizations (for example, in Romania, National Authority of Tourism, from Ministry of Transport, Construction and Tourism), there’s responsibilities concerns countries or some major regions from a country territory’ s promotion as a sustainable tourism destination (for example, Romania’s tourist promotion as well as some specify areas or regions such as Danube Delta, Maramures or Bucovina).

On this level, there’s contribution to destination marketing can involve next categories of activities:

- Marketing research concerning market and the establishment of market shares, market segmentation, tourists’ needs acknowledgment, defining destination images and branding; disseminating the researches’ results to there’s partners or collaborators;

- Liaising with and influencing private sector partners to achieve sustainable tourism priorities;

- Coordinating elements of tourism products not provided by the services suppliers or tourism operators (such as tourists information and sustainable destinations’ promotion);

- Providing sustainable tourism investments and marketing support for new and grow products relevant to sustainable tourism policy goals;

- Creating marketing facilities and initiating collaboration campaigns for small and middle business that otherwise are unable to participate in marketing on a national and international scale;


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- Providing advises and leadership based on information sources (Middleton, Clark, 2001, pp. 335).

b. On local and regional level, private organizations (tourism services suppliers or tourism operators’ associations) or public organizations (branches or central authorities agencies, entities that functions in or near other institutions (for example, Tourism Information Centre INFO Litoral, Constanţa).

These organizations are absolutely necessary to perform for their tourism destination as sustainable in „choosing messages and symbols that serve to identify and position or brand their destinations in the minds of prospective visitors and differentiate them from all others” (Middleton, Clark, 2001, pp. 336).

c. On tourism economic organizations level (services suppliers, tour-operators, travel agencies). Traditionally, tourism agents’ marketing approach, as any other firms, going from two marketing functions: increasing the satisfaction of tourism services and products consumers and profit maximization.

The new marketing orientation in sustainable tourism direction stress the need for balance between company profits, consumer’ satisfaction and the overall goal of society’s well being (Luger, 2001).

Tourism firms, whose marketing programs and activities do not fallow achieving sustainable tourism goals, can have negative impacts on the local or global environment. These impacts can manifests:

- Through services and products that are offered (through the environmental product’ component);

- Through the accessibility of destination and the image conveyed about it; - Through price or value-for-money perceived by the consumers (traditionally prices

do not reflect the environmental protection’ costs), a high value indicating a high quality of natural, social and cultural environment (Firth, 2004, pp. 14).

Achieving the sustainable tourism goals needs all tourism organizations to cooperate, as the plurality of efforts to facilitate the sustainable principles application in practice.

This collaboration must concerns: - Harmonization of all services suppliers interests; - Including –by tour-operators, in the tourism product’ content of those tourism

services that can achieve the sustainable development’ principles; this action can stimulate those services suppliers which applied the sustainable development principles in there’s activity (environment’ care, resources rational using, offal’s’ recycling etc.);

- Sustainable destinations promotion by national tourism authorities; - Common strategy formulation, under the national tourism authorities coordination,

with services suppliers, tour-operators, travel agencies, local and regional communities’ participation, concordant to economic and social general goals, as to achieve the sustainable development principles on the society level.

2.4. Marketing impact on sustainable tourism achievement Through there’s specify and content, marketing activities and practical instruments used to

concretize them can influence the sustainable tourism objectives’ achievements in many ways: - In addition of people component to traditional 4Ps of marketing mix, the marketing

managers fallows to increase the tourists number and to encourage the consumption’ increasing, and that means an excessive utilization of resources

- Because the tourism products are created mostly considering the needs and wants of the visitors and the key competences of business, with little consideration being given to the overall goals and wishes of the local community, in many cases this action has result the destroying of those resources that are more attracting to the tourists;

- The excessive promotion and commercialization of those tourism products that are the tourism firms offers, can result in degradation of the cultural and physical environment at the destination and, inevitability, the economic sustainability of the destination;


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- Visitors which holiday at a tourism destination known to have a fragile ecosystem and its offered as a luxury tourism product, can still demand more comfort, that involves supplementary resources’ offer and consumption;

- Tactical pricing reducing way used by tourism business without concern for the carrying capacity of the site or destination, resulting in resentment from local residents opposed to overcrowding;

- Promotion is aimed at conveying a certain type of image to relevant segments so as to maximize visitors’ numbers rather than portraying an accurate image of a destination. An emphasis on portraying unsustainable activities in advertising may lead to such behavior becoming the norm by visitors once at the destination;

- The market targeting is currently focused on tourists’ incomes, with little consideration given to the types of tourists who would have the smallest impact on the local community and destination environment. Such practices generally result in short-time financial gain but the expense increasing of long-time preservation;

- The lack of cooperation with local communities to ensure that their goals and the goals of individual tourism operators are compatible, practice that goes against guiding principles of sustainable tourism (Firth, 2004, pp. 14-15).

Applying the sustainable development principles in marketing activity represents the necessary steps to realize a healthy tourism, but also a way to educate the tourists in to the spirit of all world care.

Bibliography

Baker, M.J. (1995), Marketing. Theory and Practice, MacMillan Press Ltd., London Balaure, V. (coord.), 2005, “Marketing turistic”, Editura Uranus, Bucureşti Berry, L.L., Parasuraman, A., 1991, “Marketing Services. Competing through Quality”, The Free

Press, New York Bran, F., Simon, T., Nistoreanu, P. (2000), Ecoturism, Editura Economică, Bucureşti Catedra de Economie si Politici Economice, A.S.E. Bucureşti, 2000, Economie, Ed. a V-a,

Bucureşti Firth, T. (2004), Marketing for Sustainable Tourism, University of Sydney, on Web Page:

www.besteducationnetwork.org Gronroos, Ch., 1990, Service Management and Marketing, Lexington Books, Massachusetts,

Toronto Kotler, Ph., Armstrong, G., Saunders, J., Wong, V. (1998), Principiile marketingului, Editura

Teora, Bucureşti Luger, K. (2001), Sustainability and Quality Tourism: Setting the Agenda for Another Marketing

Perspective, University of Salzberg Middleton, VTC, Clarke, J. (2001), Marketing in Travel and Tourism, Third Edition, Butterworth-

Heinemann, Oxford Middleton, VTC, Hawkins, R. (1998), Sustainable Tourism: A Marketing Perspective,

Butterworth-Heinemann, Oxford Muhcină, S. (2002), Marketing în turism, Ed. Muntenia&Leda, Constanţa Nistoreanu, P. (coord.) (2003), Ecoturism şi turism rural, Ed. a II-a, Bucureşti Stănciulescu, G. (coord.) 2000, Managementul turismului durabil în ţările riverane Mării Negre,

Editura All Beck, Bucureşti World Travel Directory, WTO Publication, 1988 WTO-Tourism: 2020 vision: influences, directorial flows and key trends, Executive summary,

Madrid, 1997 WTO, WTTC, 1995, The Earth Council – Agenda 21 for the Travel and Tourism Industry

Towards Environmentally Sustainable Development ***www.iisd.org


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TRADE AND ENVIRONMENT – OPPORTUNITIES AND RISKS

Florina BRAN Ph. D. Professor

Academy of Economic Studies, Bucharest Abstract. Trade and environment are of crucial importance for human welfare. On

the other hand, policies regarding both areas were formulated in isolation from each other. The bi-univocal relation between trade and environment was analyzed in numerous studies requested by governmental bodies and international organizations, and also in milestone scientific works. Our paper aims to present the reasons on which there were built the main hypotheses regarding the trade effects of environmental regulations and the ecological effects of measures pursuing trade liberalization and of discussions on the compatibility among trade policies and environmental policies, departing from the theories and empirical evidences from different papers in order to propose working hypotheses.

Key words: environmental regulations; environmental Kuznets curve; trade liberalization; environmental policies.

REL Classification: 10E

Introduction. The potential for occurring conflicts between environmental protection and international trade is high. The last couple of decades witnessed a proliferation of environmental regulations and international environmental agreements, and also the expansion of international trade and investments. The two domains, environmental protection and international trade developed independently. Numerous regulations regarding international trade were adopted before environment was approached as a global issue. On the other hand, environmental regulations and international agreements have provisions that conflict with the current trade rules.

The relation between trade and environment was analyzed in many specialty papers, required by governmental bodies or international organizations. In time, on the base of empirical data and of knowledge from the field, there were formulated some theories regarding the ecological consequences of the trade and, respectively the trade consequences of environmental protection.

In this paper we are aiming to bring some clarifications regarding the compatibility among trade policies and environmental policies. In this respect, we identify the theories and analyze the premises which stood at the base of their formulation. Then a discussion is set up in which we debate on the interactions between trade and environment and its consequences in terms of welfare.

Trade effects of environmental regulations. Environmental regulations influence competitiveness on international markets. This influence is expressed on different plans, which there grouped by the specialists form the International Institute for Sustainable Development in three categories:

- The environmental concern is translated in regulations that restrict imports on the base of ecologic criteria;

- Buyers requires that suppliers and exporters of products to be certified with integrated management systems based on ecological criteria (certified ISO 14000, EMAS);

- Firms could “green” their activity by their own efforts creating niche markets for exports or protecting their market shares.


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Governmental regulations regarding environmental protection are of two categories: 1. standards regarding production processes (PPM standards – production processes and methods) and 2. standards regarding the physical characteristics of the products (product standards).

The trade effects of PPM standards are criticized mostly because of the following reasons: - PPM standards along with the ecologic scopes are also used to protect domestic

economies. For example, a country which heavily relies on the use of nuclear power will impose a tax for products using energy inputs from thermal power plants which use coal as fuel;

- Environmental conditions in countries where certain PPM standards operate are different than in the exporting countries. For example, where air quality problems are a priority, while in the country producing for export this problem is not an issue. Therefore, the PPM standards for air quality protection are not necessary in the exporting countries and represent useless requirements.

Considering these observations GATT (General Agreement on Tariffs and Trade) forbid the use of PPM standards. Therefore, companies are not affected by the differences between national environmental regulations. Nevertheless, on medium and long run it is possible that the situation will change. Nongovernmental organizations involved in environmental protection, social assistance, and animal protection have intensified their efforts in order that PPM based discrimination to be allowed.

Compliance with product standards could be considered as a problem of compliance with the specific requirements of a client. Nevertheless, there are some aspects which generated countless discussions. Among these there is the fact that the proliferation of national regulations creates difficulties for external suppliers in complying with them and that they are acting in favor of local product. A particular chapter is represented by sanitary and phytosanitary standards (SPS) applied in order to protect the consumers’ health and to prevent contamination of agricultural products. Because other trade barriers were removed some assume that these standards represent the new face of protectionism. The main charge is that even if SPS standards are justified because they aim health protection, they are meanwhile less accurate. The final result of applying such standards is loosing the market share for a supplier, regardless to the intention – protectionist or not.

Voluntary environmental standards are allowed by the rules of the World Trade Organization (WTO). Their use covers a relatively small percent of the market of any good. Nevertheless, it is more and more clear the intent to impose such standards for governmental procurement. For example, Great Britain integrates ecological criteria in the public procurement policy. Public procurement represents 10 to 15% from the GDP of a country and therefore members of WTO are preoccupied in signing agreements that respect GATT principles – nondiscrimination among foreign suppliers and equal treatment of foreign and domestic suppliers. Until now the results of their effort has materialized in signing the Agreement on Governmental Procurement. However, unlike other WTO agreements, this one is plurilateral instead of multilateral, and therefore countries are not bound to sign it as a condition of membership.

Voluntary environmental standards represent, meanwhile, economic opportunities. Thus, firms could create for themselves by using these standards “green” niche markets or they could maintain their market shares. For example, the promotion of “green” policies in governmental procurement could stimulate firms for adopting voluntary standards. In this respect, an important requirement is the international recognition of standards.

Ecologic effects of trade liberalization. Evaluating the ecological effects of trade liberalization was investigated in numerous studies on the base of empirical date and by using theoretical equilibrium models.

Supporters of the free trade question the negative ecologic effects of more intense trade. Premises on which this position is grounded are the fact that a more intense trade lead to scale effects, respectively economic growth, and economic growth and environmental quality are related accordingly to the environmental Kuznets curve. These studies reveal the fact that the indicators of environmental quality tend to deteriorate with the increase in income per capita until a certain level of this, but than a ceiling arise followed by an inverse relation – the indicators of environmental quality are improved along with the increase in income per capita (fig.1).


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Figure 1. Environmental Kuznets curve

The main criticisms of this position are: - It is possible that economies remain stocked at a certain level without reaching the

point at which pollution start to decrease; - The environmental Kuznets curve does not reveal nor the situation of ecosystems

integrity, neither the irreversible losses that may occur on short term, such as, for example, extinction of some species;

- The cumulative effects of ecological changes, that potentially can generate crisis, are not represented in this hypothesis;

- The environmental Kuznets curve is verified only in the case of certain pollutants – sulfur dioxide, nitrogen oxides. Greenhouse gas emissions and energy consumption did not reach a decreasing trend even in the richest countries;

- The turning threshold of the curve could reach quite high levels situated between 5 000 and 8 000 USA dollars per capita and therefore until this level is reached irreversible environmental losses could be recorded;

- Because of the structural changes in the economy, i tis possible that pollution will worsen slower, but does not decrease in absolute terms, even if the level of incomes rises.

Another hypothesis on the ecological effects of trade is that once a country starts to industrialize, trade liberalization contributes to a structure of the economy that is less pollutant than in countries with more closed economies. There are some empirical evidences that support this hypothesis. Thus, a study made by Birdsall şi Wheeler (1992) in order to test the hypothesis that free trade encourages the development of pollution „heavens” shows that in open economies from Latin America, in the period 1970-1980, technologies have became cleaner and in the same time the pollution intensity increased in the overall Latin America than OECD countries implemented more restrictive environmental regulations.

By using the approach of comparative advantages a range o authors assessed if certain coun-tries have became specialized in manufacturing goods with high environmental impact. The results show that industrialized countries have had 73% of the export of products with high environmental impact and their proportion remained the same in 1990. On the other hand, some major structural changes occurred in the trade of manufactured goods. Thus, the share of industrialized countries in the export of these products dropped from 91% to 81% in the same period.

Discussions. The relation between trade and environment is highly debated and there are numerous hypotheses, more or less tested. Trade and environmental protection are processes assumed as desirable for the society. In other words, governments pursue to intensify both of them. As it comes out from the facts presented above, there are fears that the relation between the two processes is contradictory, conflicting. That is intensifying trade leads to worsening of environmental problems, and environmental protection restricts free trade. Therefore, one can assume that if both processes are supported their effects cancel and as follow the increase in social welfare – the final objective of such policies – cannot be reached.

At this moment, it is important to bring out the fact that in conceptual debates from this field trade is understood as international trade. Therefore, the combinations among governmental policies for supporting free trade and environmental protection will lead to outcomes that will not materialize in the same country where were formulated. From here it comes out that in a country where both processes are supported it is possible to record an increase in welfare, since the


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ecological consequences of the trade or the trade effects of the environmental regulations do not manifest in the same country. Questions that will need to be answered are which effects will be recorded by the countries with that there are established trade relations, how the effects on those countries will distribute, there has to be countries to be considered disadvantaged or the overall effect at global level will be benefic from both points of view.

Another problem that deserves attention in is what extent trade and environmental policies are compatible at the level of a country. This is openness to international trade and strict environmental regulations will lead to both scale effects and a cleaner environment in that country or on a certain dimension trade and environmental protection will cancel their effects in terms of welfare. For example, the benefic effects of trade will be noted, but the environment will be more polluted, respectively there will be no evidence of trade benefits, but the environment will remain less polluted. The empirical evidences presented above show that in developing countries the openness to international trade has led to better environmental conditions, while in closed and growing economies pollution mounted up. Unless this evidence appears to confirm a favorable global effect, we consider that it is necessary to be analyzed more cases like this in order to make a generalization. In addition, it could be useful to verify this relation in the case of a hypothetical situation of a uniform level of development or a comparable one of the countries involved.

Conclusions. The relation between trade and environment is a relation that raised numerous controversies. One of the possible causes is represented by the international dimension of both processes, since in this context the benefic effects expected by society – economic growth and a cleaner environment for living – could be canceled.

The intensification of the preoccupations in environmental protection is materialized in two forms: formulation and increasing of exigency of governmental regulations and elaboration and more and more widespread use of voluntary environmental measures.

In the first case, trade effect could be catalogued as unfavorable, since numerous studies proved the protectionist intention of some regulations. In addition, GATT does not allow the use of PPM standards that are considered as barriers for the free trade. On the other hand, in the case of voluntary environmental measures, unless these are relatively little used, it is appreciated that they could be transformed in a competitive advantage and could contribute to the development of “green” markets.

The ecologic effect of trade liberalization is appreciated departing from the hypothesis this contribute to economic growth. Nevertheless, the relation between economic growth and environmental quality remain controversy, since the most important hypothesis – the environmental Kuznets curve – still has many criticisms, based on both appreciation regarding conceptual relations, and empirical evidences. On the other hand, there are a study that confirms the fact that industrializing countries with large openness to international trade record an increase of ecological performances too.

In this conditions, it becomes relevant a discussion on the compatibility among trade and environmental policies. In order to clarify this aspect there are necessary studies that will investigate how the effects of national policies from the two domains will distribute on the economies of countries with that trade relations were established, if there has to be countries to be considered disadvantaged or the overall effect will be benefic from both points of view.

Bibliography

Bran, Florina, Pârgaru, I., Ioan, Ildiko (2004), Politicile comercială şi de mediu ale

României, Editura ASE, Bucureşti Bran, Florina (2007). Riscurile ecologice ale mondializării economice, în volumul

Evaluarea şi gestionarea riscurilor ecologice, Editura ASE, Bucureşti Figueroa, E.B., Environmental impacts of globalization through trade liberalization in

agriculture: Analyzing the empirical evidence from Latin America, Conference at Harvard University, 1999

Rojanschi, V., Bran, Florina, Grigore, F., Diaconu, Simona (2004), Elemente de economia şi managementul mediului, Editura Economică


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TRANSFORMING ECOLOGICAL EFFECTS IN MARKET SIGNALS BY AWARENESS RAISING

Ildiko IOAN Ph. D. Lecturer

Geani GRĂDINARU Ph. D. Lecturer

Academy of Economic Studies, Bucharest Abstract. The emergence and worsening of ecological problems have numerous causes.

Research results show that one of the causes is that environmental problems are not “noticed” by the market. In order to overcome the problems related to “market failure” there were formulated environmental policies that pursue to create correction mechanisms. In the last years, a growing importance is granted for tools based on information, communication and education. Our paper aims to bring some clarifications regarding the possibility that by raising awareness on environmental problems results a behavior which is different from the economically rational one. In this respect, there are in the first place debated aspects regarding environmental awareness raising – content, requirements, potential, and limits. Than there are presented relevant case studies and a brief analysis of the ecological activism in Romania. Our findings show that as long as ecologic effects are manifested as accidents, their potential to influence economic behavior throughout awareness is greater.

Key words: environmental policy; awareness; environmental NGOs; information

campaigns. REL Classification: 15C

Introduction. The last decades witnessed both the worsening of environmental

problems, and the increasing of awareness regarding environment. As a consequence, there had take place strong diversification of action ways for preventing environmental degradation and mitigating adverse ecological effects. Meanwhile, as the social development has advanced, approaching common issues, as is the case of environmental protection, passed from central initiative, of the governmental authority, representative according to the principles of democracy, to the initiative of the civil society, of which representation is a voluntary one, based on involvement and awareness.

The governmental authority is involved in environmental protection through formulating a special policy for this field and projecting and elaborating implementation tools according to the principles of efficiency and effectiveness.

The civil society is involved in environmental protection in a variety of forms, but the most widespread is the concerted action of nongovernmental organizations.

The tools to be used are different. Thus, the governmental authority has the possibility to enforce to society new rules or standards, as long as their use is justifiable against a


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common objective. Nongovernmental organizations depart from the objective beliefs of a relatively small group, and the possible rules have to be respected only by who consider that the way of action and the pursued goals are common with the ones stated by the NGO.

The complexity of environmental problems, the contradicting theories on which national policies were founded, the international confrontation in the elaboration of policies for different problems, the contradiction between economic interests and conservation interests there are as many incentives for continuing fundamental and exploratory research in order to create new tools and improve the existing ones for the elaboration and implementation of environmental policies.

The limits of traditional tools are more and more discussed in the specific literature, but also in governmental papers. Therefore, the attention of the specialists is focused on possible alternatives, respectively the group of tools based on information, communication and education. In this paper, we are aiming to reveal some aspects regarding the potential and the limits of awareness in transforming ecologic effects in market signals.

The environmental awareness is a topic highly debated in the last years. The economic theory explains behavior on the base of economic rational (Homo oeconomicus). Social studies reveal the complexity of behavior determinants. Our steps were as follows: presenting some details regarding the difficulties encountered in the implementation of environmental policy; outlining the content of awareness; presenting situations in which acknowledging the environmental problems, voluntary or enforced, lead to different decisions of some economic agents. In the same way, we considered relevant to bring some milestones from the Romanian space. Therefore we realized a brief presentation of ecologic activism in Romania.

Implementing environmental policies – experiences and expectations. Environmental degradation has occurred once the path of economic development and the human population have increased. Causes of this process are complex. The result of the research in this field pointed out that human activities have contribution to these phenomena. In-depth studies of environmental economics develop this argument and reveal the fact that market does not have the capacity to rule the economic processes in order to avoid negative ecological effects.

Than this disability is motivated by the common good feature of the environment, and also by the fact that the market does not „receive” signals than the ecologic effects are negative.

Environmental policy pursues to interfere in order to correct the market “failure”. The governmental authority’s intervention is made through imposing some restrictions, emission limits, behavior rules etc. respectively “commands”, applying some additional taxes or creating specific markets and through educating and informing population. After all it is aimed to change behavior in such a way that it reflects in the same time economic and ecologic rationale.

For not long ago prevailed the use of command-control tools. This approach assumes that governmental agencies develop some rules and standards. On their base, technologies there are adopted, or on the contrary, there are bounded according to their ecological impact; there are established the pollutant quantities to be emitted in environment, respectively the amount of materials that could be extracted from common resources such as fisheries or forest.

Throughout standards and regulations the governmental agencies try to control the behavior of firms, other governmental agencies and of the citizens. This is the oldest way of intervention in overcoming the “tragedy” of the commons. Beside tradition, other arguments that support the use of this tool are (Rojanschi, Bran, 2002):

- From the beginning there are established the democratic rights of all citizens


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o against sever problems generated by: production, use, transport, storage of dangerous substances or products; pollutants emissions in the environment.

o Regarding behavior and environmental quality - Could be applied than the market mechanisms and convincing communication are

absent or are failing. In the last fifteen years there were used implementation tools based on market. This

change has come into action because of the evolutions on theoretical plan, but also because of the shortcomings in the use of “command-control” measures. Among the most important limits of the command-control system we mention (Bran, Ioan, 2002):

- it is very time-consuming to produce a solid and integrated structure of legislation; - could give the wrong impression that once solved on paper the use of the rule will

enter in action; - cannot cover all the situations encountered in practice in a equitable and flexible

manner. In the approaches based on market mechanisms, instead of detailing what could or

has to be done, the government enforce constrains or a taxes on pollution and leave the decision to those of whom behaviour needs to be changed. The tax or restriction has the role to transform ecological effects in market signals. The most used strategies of this type are carbon taxes and tradable pollution permits, their mechanism being presented in fig.1.

Figure 1. The mechanism of action for pollution permits and for „green” taxes

(Bran, 2005) Tools which use market mechanism have the following disadvantages (Bran, Ioan,

2002): - sometimes it is not possible to use them because of the problem or because of

difficulties in application, such as the provisions of trade agreements and international policies;

- cannot secure safety (e.g. cannot secure that the production and use of dangerous products and substances will end);

- do not lead automatically to the internalization of “environmental” values The third category of tools, called also social-communicating tools pursue to change

the behavior by referring to normative value systems, but also by improving communication among the shareholders. The mechanism of these tools tries to induce behavior change by involvement that means participation, but allows a certain “self-regulation” and social liberties. These are realized through voluntary agreements, according to private law. The agreements could deal with any subject, as long as that is not legally bounded.

0

P

Demand for pollution rightss Supply of pollution

permits

Q

Pollutionprice

Pollution quantity

0

P

Demand for pollution rights

Pigouvian tax

Q

Pollutionprice

Pollution quantity


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In the literature there are addressed as “new” tools of implementing environmental policy. If we adopt a wider framework we will note that this type of social interaction has appeared and has shaped individual behaviors long before the emergence of markets.

Awareness – conceptual clarification. Awareness assumes that somebody act than he has knowledge on that action and on its consequences. According to the Romanian language explanatory dictionary, an aware person is a person who realizes his/her possibilities, his/her role in the society.

Ecological awareness has five dimensions (Nemcsicsne, 2003): knowledge, values, attitude, willingness to act and behavior.

Acknowledging environmental problems is considered a mandatory premise for awareness, but not enough. There are already numerous governmental measures that rules the access to information. We recall here the Aarhus Agreement, from June 1998, regarding the access to information, public participation in decision making and access to justice in environmental issues.

Building ecological values for society represent the subject of deep ecology, a science branch that aims to explore which is the best society for the normal functioning of the ecosystems. Changes proposed by deep ecology are not easy to be accomplished. Ethics faces a revolutionary situation. Only the human specie has the capacity of moral evaluation. On the other hand, this specie acts only on the base of its own interest, using the other life forms. Human can be the only evaluator of things, but it has not to remain the only measure of them (Bleahu, 2001).

In the ecological ethics the belief in nature has a strong bound with the belief in accomplishing some duties. The ways in which nature exist inform about how it has to be. Values exist in nature as long as facts are taking place, but also as properties of the system. This conviction and the awareness that is involved by it could lead to the best adaptive form of Homo sapiens sapiens on Earth (Ioan, 2006).

Awareness is transformed in market signals then by its behavior the economic agent do not act economically rational. For example, it buys a product with a higher price if he knows that has a lower environmental impact even if its utility is the same. In the same time, ones consider that through awareness market signals are transmitted than following actions of nongovernmental organizations companies take decisions to invest in environmental protection or to avoid actions with negative ecological consequences.

In fact, awareness comes to action in such a way that the market recognizes the ecological consequences. Promoting this directive is based on the premise that market transmits information most rapidly, precisely and correctly.

The role of NGOs. In the world there are numerous nongovernmental organizations that take action more or less ample, more or less aggressive. Thus, there are well known the interventions of the GreenPeace, that convinced numerous companies to change their behavior considering other criteria than the economic ones. Among the most recent accomplishment we reveal:

- McDonalds drop the use of chickens feed on soybean cropped in Amazonia. Departing from the finding that the expansion of soybean crops in Amazonia represent the main threat for forest it was launched the Eating up the Amazon report. This report details the role of McDonalds and of other companies in deforestation. McDonalds and other retailers from the food chain have collaborated with GreenPeace and elaborated a zero deforestation action plan. This plan also solve other social problems from that area;

- Hewlett Packard initiated a plan to decrease the use of highly toxic chemical compounds. We note the fact that the way of presenting this information is aimed to build a favorable/unfavorable image for companies of that industry;


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- Implementing a conservative regime for western Canadian forests – after a long struggle in a campaign that took more than ten years it was accomplished an agreement among governmental authorities, local authorities, logging companies and other shareholders that bound the exploitation and secure the habitat conservation.

These examples prove that indeed through their action nongovernmental organizations enforce decisions that contribute to achieve environmental scopes and which are not based on economic criteria.

In addition, in instances than extreme situations occur – industrial accidents, natural hazards – these organizations use the momentum for transmitting information. Thus, companies that are involved are forced to spend for ecologic restoration and for prevention measures.

The increase in the size of environmental organizations as both number of members and amount of funds managed represents for companies an argument strong enough to consider in decision making this criteria – the environmental NGOs’ opinion against certain decision. However, it is not clear in that extent can be made a distinction among companies that take in consideration the possible intervention of NGOs and those that do not take that in account. In cases than ecological consequences are less obvious the role of NGOs is more important.

Another observation that could be useful is related to the moment in which NGOs come to action. Generally, NGOs intervention could be interpreted as reactive. The convincing power is based mainly on real ecological consequences that are presented in such a way that consumers or companies could identify the chain of causes and the place occupied by them in it.

Ecological activism in Romania. According to data from the Environmental and Sustainable Development Ministry, in Romania there are around 165 active organizations in the field of environment and water management.

The activities undertaken by these organizations are focused on public information, either directly through information campaigns, either through actions of involving collectives in planting, collecting, restoring; elaborating studies regarding the effectiveness of regulation in different fields; promoting and organizing ecotourism; assisting European institutions in the implementation of environmental policy; exploring of spaces with special ecologic features such as caves, remote area; researching the socio-economic phenomenon in the context of sustainable development.

We note that among these organizations there are organizations that embraced ecological consultancy, aiming to help representatives of business environment to solve environmental compliance issues. There are also organizations that promote the so called ecological businesses (eco-business), providing support for organizations that decide to adopt ecological criteria (e.g. certification in the ISO 14 000 system).

Environmental NGOs played an active role for important issues on the ecological agenda – the Roşia Montană investment, the Bâstroe Channel etc. it is important to note that civic actions that revealed the ecological consequences of these projects were managed by branches of international NGOs such as GrenPeace or World Wildelife Found.

Conclusions. Accomplishing environmental protection objectives is an important challenge for society. The complexity of the problems requires the same type of approach. Thus, it is recognized that implementing environmental policy has to be made using a combination of tools. This combination has to be shaped in such a way that against specific situations the potential of every tool is valued. In other words, it is not necessary to discuss which the most appropriate tools are. The debate has to reveal which are the possibilities to optimize the combination of implementation tools.


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In the last period a strong development is recorded for social-communicating tools. Nevertheless there are a lot of controversies related to their effectiveness and especially efficiency. In addition, the same nongovernmental organizations that aim to transform ecological effects in market signals are quite reluctant regarding the expansion of environmental voluntary measures since their proliferation could weaken the power of regulations and therefore turning back to the situation when environmental protection relied more on market than on governmental intervention.

NGOs’ actions have led in numerous cases to accomplishments. Thus, companies and the community decided according to ecological criteria pr initiated debates in order to identify ways for harmonizing the economic and ecological criteria. In fact, this shows that NGOs by raising awareness facilitates the transformation of ecological effects in market signals.

In the future, NGOs’ role will remain important since the transformation of the economy to respect environmental restrains it is a ling lasting process. By their interventions environmental NGOs could contribute also to accelerate this process.

In these circumstances, it is important to build a methodological framework for assessing and evaluating the role that awareness raising could have in transforming ecological effects in market signals. The partial success of campaigns against smoking or for selective collecting of waste proves how complexly is determined the human behavior. On the other hand, regulations and market based tools also proved their limits. Therefore, it is necessary to invest more effort in exploring the role of awareness rising and its potential.

Bibliography

Bleahu, M. (2001), Priveşte înapoi cu mânie… Priveşte înainte cu spaimă, Editura Economică, Bucureşti

Bran, Florina, Ioan, Ildiko (2002), Ecosferă şi politici ecologice, Editura ASE, Bucureşti Ioan, Ildiko, Promovarea valorilor impuse de protecţia mediului în educaţia tinerilor, în

volumul Ştiinţe ale educaţiei – educaţie universitară, Editura Unversităţii Naţionale de Apărare „Carol I”, Bucuresti, 2006, pp. 61-64

Rojasnchi, V., Bran, Florina (2002), Politici şi strategii de mediu, Editura Economică, Bucureşti


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CAPITAL STRUCTURE AND FINANCIAL PERFORMANCE – RELATED OR INDEPENDENT

VARIABLES? EMPIRICAL STUDY ON ROMANIAN COMPANIES LISTED ON CAPITAL MARKET*

Ingrid Mihaela DRAGOTĂ Ph. D. Senior Lecturer

Andreea SEMENESCU Candidate Ph. D. Assistant

Dan Traian PELE Ph. D. Lecturer

Carmen LIPARĂ Candidate Ph. D. Lecturer

Academy of Economic Studies, Bucharest Abstract. The subject of the study represents a well discussed topic in corporate

governance area. Identifying the optimal capital structure of the companies and its determinants is a main issue in financial theory, as it has an important influence on companies’ performance. The leverage of Romanian listed companies on Bucharest Stock Exchange (BSE) and RASDAQ market, based on the financial debt and the economic assets, is the object of a dynamic analysis for the period 2005-2006 using mainly descriptive statistics techniques. It emphasizes a phenomenon of homogenisation for the companies on RASDAQ and a relatively constant debt policy for the one listed on BSE. Moreover, this variable has been analysed in correlation with other financial ones in order to identify the potential of anticipation for future financing options Romanian listed companies.

Key words: corporate governance; capital structure; financial performance; capital market.

REL Classification: 11E, 19I

1. International empirical studies on capital structure and firm’s financial performance This study focuses on one of the major topics in corporate governance. The financing

decision at microeconomic level represented the main topic for a lot of studies in order to find relevant answers for two fundamental questions:

a) Does capital structure influence or is it influenced by performances and value of the companies?

* The authors are grateful to the following students from the Finance, Insurance, Banks and Stock Exchange Faculty for their support in creating the database: Stratulat Gabriela, Ştefănescu Mariana, Spiridon Florica (2nd year) and Tiţa Anca (1st year).


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b) Which are the determinants of a capital structure? If the conclusions of these studies showed that capital structure influence performances and

its determinants were identified, the positive effects for the companies must become visible. Unfortunately, neither the financial literature nor the empirical studies did find reliable answers, even if the two issues were widely treated by the economists of the last decennials.

Finding the instruments to optimise the performances of a company, including by the choice of the combination of own and borrowed resources, as well as the identification of capital structure determinants represents two of the most important themes in corporate governance and a useful approach for each investor on a capital market. The empirical studies grounded on the main financial theories in the last century, starting with Modigliani and Miller’s model (1958); (1963) and Miller’s model (1977) and continuing with trade-off theory, pecking-order theory, agency theory or signalling theory.

The studies of the determinants for leverage focused on the correlation with exogenous factors such as profitability, the absence of growth opportunities, the liquidation value of the company etc. (Chang (1987); Stulz (1990); Harris and Raviv (1990)); the correlation with endogenous factors such as the value of the company, the probability of default etc. (Harris and Raviv (1990), Stulz (1990)); the impact of share issues announcements (Harris and Raviv (1990); Stulz (1990)).

The most important empirical study, quoted by several authors who analyzed the leverage and its determinants is the one of Rajan and Zingales (1995). Most of the studies prior to Rajan and Zingales (1995) identified the financial system – bank-oriented or capital market-oriented – as a cause for the different level of the leverage, but the two authors conclude that this is not the only one and not the most important. They considered fiscal system, bankruptcy laws, bond market development or own capital structure as major reason for the leverage. After this important article, several studies on the determinants for capital structure were realized, especially in the case of developed economies, but, in the last years, also for developing or transition economies (Akhtara and Oliver (2006); Kale and Shahrur (2007); Baker and Wurgler (2002); Devic and Krstic (2001); Drobetz and Fix (2003); Hsiao-Tien, Bohdan and Tenpao (2003); Bancel and Mittoo (2004); Munyo (2004); Bevan and Danbolt (2000); Fattouh, Harris and Scaramozzino (2004); Booth, Aivazian, Demirguc–Kunt and Maksimovic, (2001) etc.).

Different factors have been identified such as liquidation premium and informational efficiency (Chun Chang and Xiaoyun Yu(2003), the proportion of fixed assets in total assets (Titman and Wessels (1988); Rajan and Zingales (1995); Fama and French (2000); Jensen and Mecking (1976), Myers (1977)), the size of the companies measured by turnover (Warner (1977); Ang, Chua and McConnell (1982); Titman and Wessels (1988)), the sector the company belongs to (Harris and Raviv (1991)), the cash-flows volatility (Myers (1977)), the percentage of depreciation in total assets (Shenoy and Koch (1999)) etc..

Financial literature on capital structure analysed the asymmetry phenomenon and it was developed in two main directions: the signalling theory and the pecking-order theory. According to the signalling theory, the leverage is a signalling instrument of the performance of a company and makes investors trust the firm. Among the first applications of the signalling theory in finance is that of Leland and Pyle (1977), Ross (1977) and Bhattacharya (1979), considered as classical in the financial area. The other approach on financial policy, the pecking order theory (Myers and Majluf (1984)) sustains that companies will borrow when the own resources become insufficient, avoiding share issues to finance their investments opportunities. The informational asymmetry on the capital market can cause difficulties for creditors in choosing performant instead non -performant companies, if the later try to misinform the market investors. Hence, credit restrictions or interest rate increases may appear (Myers and Majluf (1984), Turk and Hoskisson (1990)).

2. The database for the empirical study This study analyses the non-financial listed companies on the Romanian capital

market – on Bucharest Stock Exchange (BSE) and RASDAQ for the period 2005-2006. The


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main variables analysed are the leverage (computed using the debts with maturity exceeding 1 year) and the performance of the company.

From the database, we first excluded from the sample the non - financial companies because of the specific regulations regarding their activity, hence their leverage being influenced by several exogenous factors. According to the methodology used by Rajan and Zingales (1995) all the companies from the sector “banks and financial services” according to BSE monthly reports classification were excluded from the sample, only “non-financial” companies being studied.

Secondly, the sample contained only the companies providing sufficient information for performing the study in good conditions. The accounting indicators were obtained from BSE web site, www.bvb.ro.

The sample of companies listed on BSE containing 23 companies in the year 2005 and 31 companies in the year 2006.

The sample of companies on RASDAQ comprised 90 firms representing 5 economic sectors as follows: extractive industry, consumer goods industry – metallurgic industry, consumer goods industry – clothes industry, hotels and restaurants, real estate.

3. The variables used in the model Surprisingly, in the financial literature there is not a single definition for a company’

leverage. The choice depends, mainly, on the aims of the researcher. In Rajan and Zingales quoted study (1995) five alternative definitions of the leverage were used. Because this approach is considered to be the clearest in the financial literature, many studies accepted it, completely or partially: Booth, L., Aivazian, V., Demirguc – Kunt, A. and Maksimovic, V. (2001); Drobetz and Fix (2003); Munyo, I (2004); Devic, A. and Krstic, B. (2001) etc., no matter if they were realized on developed economies or on the developing ones (Poland, Hungary, Uruguay etc.).

1. In this study, we chose to compute the leverage starting from the balance sheet indicator „Debts with maturity exceeding 1 year”, considered as paying an interest, divided by the economic assets value. In defining all the indicators expressed as a percentage, the ECONOMIC ASSETS indicator was used.

Economic Assets = Own Capital + Financial Debts (1) The reason for choosing this indicator instead of total assets is that, at least from a

theoretical point of view, the net working capital has different values from one sector to another and this can influence the level of the indicators computed on this base.

assetseconomicdebtfinancialgdatfin = (2)

2. Tangible assets, as a percentage in economic assets. Under uncertainty, in

informational asymmetry conditions, the assets structure influences the capital structure, the companies having more tangible assets being more likely to receive bank loans or to issue bonds. If banks don’t have enough information on the companies demanding loans, the companies with more intangible assets will receive less or no loans. Hence, a positive correlation between tangible assets and leverage suggests the existence of an informational asymmetry.

assetseconomicassetsgibletanAE/assetstan = (3)

3. Turnover (CA). Generally, a company to be borrowed might need for a big turnover.

On a market with informational asymmetry, more is known about the activity of a company, easier will be for the firm to obtain a loan. Moreover, the investors consider that a big company has solid bases to develop investment projects and can manage better the cyclic fluctuation of its activity. In this context, the risk of default is considered to be less for a big company, comparing to a smaller one (Ang, Chua and McConnel (1982), Titman and Wessels (1988)).


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4. The company’s performance. In the financial theory there are several points of view on the type of correlation existing between the profitability of a company and its leverage. Hence, according to the pecking order theory, a negative value of the correlation coefficient between the two variables is expected. On the other hand, authors like Ross (1977) or Leland and Pyle (1977) sustain the idea that capital structure is a signalling instrument for the performances and the perspectives of a company and, therefore, a positive correlation between leverage and performance is expected. According to the models based on agency theory (see Jensen and Meckling (1976), Jensen (1986)) a high leverage helps in controlling agency costs associated to shareholders control on manager’s acts regarding the use of cash excess generated by a company without consistent growth opportunities.

The instruments for companies’ performance quantification are quite different, but for the purpose of our econometric study we selected 3 indicators, namely two indicators computed in accounting values and one based on market values:

equityincomenetROEequityonreturn valuesaccounting == (4)

assetseconomictaxesanderestsintbeforeearningROAassetsonreturn == (5)

tioncapitalisamarketincomenet

PER1equityonreturn == (6)

4. The methodology of the study The first study realizes a dynamic analysis for the financial leverage, for BSE, but

also for RASDAQ, for 2005 and 2006 years, using the descriptive statistics with indicators such as: average, median, minimal and maximal values, variance, variation coefficient etc.

The second study focused on a possible influence of tangible assets (as percentage of economic assets) on the leverage, considering tangible assets as “guaranties” for higher leverage. The relationship between these two variables was analyzed separately for BSE and RASDAQ basing on annual regression models as follows:

tt

t10t AE

assetsgibletangdatfin ε+×β+β= (7)

The third study also focuses on leverage analysis, in order to determine the dependence of current leverage (gdatfinn) on its previous level (gdatfinn-1), with and without introducing commercial turnover (CAn) as an independent variable. The regression models are:

ttt gdatfingdatfin ε+×β+β= −110 (8)

tttt CAgdatfingdatfin ε+×β+×β+β= − 2110 (9) The forth study analyses a possible interdependence between leverage and

performance of companies. The regression model analysed the relationship between current leverage (gdatfinn) and current performance of the company (ROAn or ROEn) and secondly, the correlation between current leverage (gdatfinn) and performance of the company in the previous year (RRfinn-1 or RRecn-1).

• For companies listed on BSE: ttt ROEgdatfin ε+×β+β= −110 (10) and ttt ROEgdatfin ε+×β+β= 10 (11) • For companies listed on BSE, but also for the ones on RASDAQ:

tt

t PERgdatfin ε+×β+β=

110

(12)

• For companies listed on RASDAQ: ttt ROAgdatfin ε+×β+β= −110 (13) and ttt ROAgdatfin ε+×β+β= 10 . (14)


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5. Results The results for the first study are listed in the table below:

Descriptive statistics regarding leverage for companies listed on RASDAQ Table 1

Indicator DATFIN/AE-2006 Indicator DATFIN/AE-2005 Mean 0,140025828 Mean 0,61238 Standard Error 0,034800468 Standard Error 0,456824 Median 0,004269777 Median 0,017665 Mode 0 Mode 0 Standard Deviation 0,331975306 Standard Deviation 4,357819 Sample Variance 0,110207604 Sample Variance 18,99059 Kurtosis 41,78320629 Kurtosis 86,49638 Skewness 5,734536117 Skewness 9,200808 Range 2,73057273 Range 43,48993 Minimum 0 Minimum -2,26602 Maximum 2,73057273 Maximum 41,22391 Sum 12,74235039 Sum 55,72653 Count 91 Count 91 Variation coefficient 2,370814794 Variation coefficient 7,116207

The variables form the table 1 emphasize, in the first place, an important modification

of the average leverage, which reduces from 61.32% in 2005 to 14% in 2006. This evolution is accompanied by a decrease of the leverage variability, from 436% to 33.2%. This conclusion is sustained by the variation field of the indicator – its minimum and maximum – as well as by the variation coefficients (computed by dividing standard deviation with mean) which decrease from 7.11 to 2.37.

For the companies listed on BSE, the descriptive statistics are presented in table 2 and suggest a relatively different situation than that on RASDAQ.

Descriptive statistics regarding leverage for companies listed on BSE Table 2

Indicator DATFIN/AE-2006 Indicator DATFIN/AE-2005 Mean 0,053285 Mean 0,059389 Standard Error 0,024288 Standard Error 0,023955 Median 0,003747 Median 0,013657 Mode 0 Mode 0 Standard Deviation 0,11392 Standard Deviation 0,112358 Sample Variance 0,012978 Sample Variance 0,012624 Kurtosis 6,975852 Kurtosis 6,614493 Skewness 2,723046 Skewness 2,685668 Range 0,435452 Range 0,415703 Minimum 0 Minimum 0 Maximum 0,435452 Maximum 0,415703 Sum 1,172262 Sum 1,306568 Count 22 Count 22 Variation coefficient 2,137951 Variation coefficient 1,89189

A relative stability for mean leverage around 5% both in 2005 and 2006 can be noticed, together with a standard deviation also constant, of 11% each year and with small discrepancy between minimums and maximums, respectively between 0% and 40%. The homogeneity of the data in the two years is also supported by close value of variation coefficients, for each year.

The second study analyses the correlation between the leverage of the company and its tangible assets as a percentage in economic assets. The study was accomplished separately for the companies listed on BSE and RASDAQ.


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On BSE, the conclusions for 2005 suggest a positive correlation between leverage and the proportion of tangible assets in economic assets, but this correlation explains only a small part of the leverage (6.9%). The results can be explained by the observation that the lending decision takes in consideration only in subsidiary the guaranties of the companies, the main criteria being their ability to generate future cash-flows to pay creditors.

The model is:

tt

tt AE

assetsgibletan0969,0gdatfin ε+×=

T-statistic sustains the significance of the coefficient with a 99% probability (t-stat = 4,02), while Durbin-Watson (2.34) suggests that leverage also depends on other factors.

On RASDAQ, for 2005, it was identified a stronger correlation between the leverage and tangible assets (84%), which can be associated with a lower ability to appeal to bank loans (as a type of credit which demand guaranties).

The numerical model is:

tt

tt AE

assetsgibletan399,0gdatfin ε+×= .

T-statistic and Durbin-Watson test having values of 21.80 and respectively 1.88 sustain the validity of the model.

For 2006, the influence of tangible assets has an important decrease (only 20%), t-statistic (4.75) and Durbin-Watson test (1.74) sustaining the model. The reducing correlation coefficient can be explained by more relaxed bank regulations regarding credits for economic agents on the period.

The numerical model is the following:

tt

tt AE

assetsgibletanx0906,0gdatfin ε+= .

The third study focuses on the dependence between current leverage and the previous one and describes, on one hand, the coherence of capital structure policy in Romanian companies, and on the other hand, a greater accessibility for loans.

The study for the companies listed on BSE shows a strong correlation between current and previous leverage, explaining 25.9% of its variation.

ttt gdatfingdatfin ε+×+= −13211.00395.0 . T-statistic (3.395) and Durbin-Watson test (2.21) confirm the validity of the model.

The results sustain the coherence of financing policies, but, also a higher availability for loans with β positive coefficient.

Taking into account the turnover as an estimator for the size of the company, the numerical model become:

tttt CAgdatfingdatfin ε+×+×= − 0395.03117.0 1 . T-statistic sustains the significance of the coefficients with a 95% probability, while

Durbin-Watson test (2.21) suggests the validity of the model. However, the influence of the two variables on leverage is only of 25.9%, showing that the size of the company has very small significance for the level of leverage.

On RASDAQ, the leverage is neither significantly influenced by the size of the company, nor by the previous leverage, showing a relative incoherence of capital structure policy of the companies.

The forth study analyses the dependence of the leverage on the performances of the companies. For BSE listed companies, the results were the followings:

• The return on equity in the previous year has not a significant influence on the present leverage (t-statistic is around 0).

• The current return on equity is a determinant factor of the present leverage explaining 21.34% of the leverage deviation. The mathematical model is the following:


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ttt RRfingdatfin ε+×+−= 75.1239.1 . The model is sustainable with 98% probability, as t-statistic and F-statistic prove, and

Durbin-Watson value of 2.06 confirms the model. The results prove that in the lending process, the past financial performance of the

companies is less important than the future one. • The leverage is not significantly influenced by the performance of the companies in

market values, estimated by 1/PER, proving that companies do not use market resources for financing, unless bank loans are inaccessible. The result sustains the pecking-order theory.

For the sample of companies listed on RASDAQ, the financial performance is measured by the return on assets and market performance is estimated through 1/PER. The conclusions are the following:

• The leverage is not determined by the financial performances in the previous year, showing that in 2006 the lending process is focussed on the forecasting of performance more than on their previous one.

• Regarding the influence of the present return on assets on the leverage, the results are different for 2005 and 2006, as follows:

a) in the year 2005, the return on assets has a strong negative effect on the leverage, explaining 97.67% of its variation in the single regression model, with a probability of 99% and a Durbin-Watson statistic of 1.99.

ttt cRgdatfin ε+×−= Re549,0209,0 These results confirm the hypothesis that in 2005, companies used credit only for

completing their own financial resources, according to the pecking order theory. b) in the year 2006, the return on assets had a positive impact on the leverage, but its

influence was far weaker than in the previous year (14.74%). The model is significant with a 98% probability, and Durbin-Watson statistic of 1.92 sustains the validity of the model.

ttt cRgdatfin ε+×+= Re025,1207,0 . The explanation of these results could be more relaxed lending conditions and a more

coherent lending policy of the companies. • On RASDAQ, also, the influence of company performance in market values on the

leverage is insignificant, confirming once more the relevance of the pecking order theory on the Romanian capital market.

6. Conclusions The study emphasized common points, but also differences between companies listed

on BES and RASDAQ, regarding leverage and its correlation with several variables such as: tangible assets, turnover or performance of the companies. A strong direct relation was demonstrated between leverage and tangible assets, but weaker in the year 2006.

The study for BSE listed companies suggest a strong correlation between current and previous level of the leverage, relationship that do not stands for companies on RASDAQ.

Finally, it can be observed a stronger dependence of the leverage from the current level of performance in accounting values is signalled, the performance in market values being irrelevant in explaining the leverage.

Acknowledgements This research was supported by Grant No. 86 / 2007, AT, financed by National

University Research Council (CNCSIS).

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Baker, M., Wurgler, J. „Market timing and capital structure”, Journal of Finance, vol. 57, 1-32, 2002 Bevan, A., Danbolt, J., “Capital Structure and its Determinants in the United Kingdom. A

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1998, pp. 2107-2137 Devic, A., Krstic, B., “Comparable Analysis of the Capital Structure Determinants in Polish and Hun-

garian Enterprises”, Facta Universitatis, series Economics and Organisation, vol.I, no.9, 2001 Dragotă, M., Semenescu, A., “An industry analysis of capital structure determinants. Empirical results

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Switzerland”, Working Paper no.4/03,2003 Fattouh, B., Scaramozzino, P., Harris, L., „Capital Structure in South Koreea: A Quantile

Regression Approach”, The Review of Financial Studies, no. 5, 2004, pp. 437-470 Harris, M., Raviv, A., “The Theory of Capital Structure”, Journal of Finance, no.1, 1991 Hsiao-Tien, P., Bohdan, P., Tenpao, L., „The Determinants of Capital Structure Choice Using

Linear Models: High Technology vs. Traditional Corporations”, Journal of the Academy of Business and Economics, 2003

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Jones, D., Klinedinst, M., Rock, C., „Productive Efficiency During Transition: Evidence from Bulgarian Panel Data”, Journal of Comparative Economics, 26 (3), 1998, pp. 446–464

Kale, J., Shahrur, H., „Corporate Capital Structure and the Characteristics of Suppliers and Customers”, Journal of Financial Economics, vol. 83, 2007, pp. 321-365

Koch, P. D., Shenoy, C., „The Information Content of Dividend and Capital Structure Policies”, Financial Management, vol. 28, no. 4, 1999

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ROMANIA AND THE FISCAL HARMONIZATION IN THE EU

- The Case of Indirect Taxes -

Anton COMĂNESCU Candidate Ph. D.

Universite Libre, Bruxeles National Bank of Romania

Abstract. In the filed of harmonization of indirect taxes, one can notice a certain

regional trend in Central and Eastern Europe, where fiscal authorities are engaged in an ample reform process, partially induced by the need of convergence with the internal market and by the systemic evolutions of the respective national economies. Therefore, in all the central and eastern European accession countries, the VAT and excise duties legislation has been reformed or amended. In many of these cases, the pressure in the direction of reforms came from the business environment, strongly interested in the simplification and modernization of legislation, despite a certain resistance on the side of fiscal authorities. Even with the intensification of the reform process imposed by the EU accession, the fiscal authorities display certain inertia in the sense of lack of adaptation to the EU legislative environment. For example one can notice a significant degree of ignorance regarding the decisions of the European Court of Justice(1).

Key Words: fiscal harmonization; indirect taxes; jurisprudence; fiscal policy. REL Classification: 8K, 13E, 20J

I. Regional evolutions in terms of VAT and excises In the field of indirect taxation, where the secondary legislation is very

comprehensive, the recourse to the ECJ in order to safeguard the principles of the single market should be very frequent. The Court has issued until 2006 no less than 450 rulings concerning cases involving the application of VAT. A similar situation can be observed as concerns excise duties which, alongside VAT, are otherwise part of what is called „positive integration”(2) because regulated through EU Directives and Regulations which should greatly simplify the application of indirect taxes at national level.


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Figure 1. ECJ VAT rulings, 1976 - 2007

Below are listed several landmark cases adjudicated by the ECJ in indirect tax matters: • Tolsma (1994), Holland: Determining the exigibility of VAT on the basis of the

direct link between the supply of goods and services and the amount received in counterpart. • Recaudadores (1991), Spain: Determining the exigibility of VAT for persons acting

independently while exercising a public duty. • Charles (2005), Holland: The deductibility of VAT in the case of capital assets

used for dual purposes. • Optigen (2006), Great Britain: The „caroussel-type” fraud. • Evangelischer (2000), Austria: The dinstinction between the application of excises

to alcoholic and non-alcoholic drinks, respectively. • Braathens (1999), Sweden: Harmonisation of the system of excises levied on

mineral oils by allowing an exemption for mineral oils supplied as fuel for aerial navigation, other than leisure flights.

• De Danske Bilimportorer (2003), Denmark: Aplying taxes to automobiles at the level established by the authorities without inducing discriminatory treatments.

• Nunes Tadeu (1995), Greece: Setting a car registration tax, but conditional upon not inducing discriminations prohibited by Article 90 TEC. This case was the object of a very recent ruling by the ECJ (20 September 2007), as a result of an infringement procedure initiated by the European Commission against Greece.

Indirect taxes as % of GDP Table 1

Average Difference

2000 2001 2002 2003 2004 2005 Rank in EU-27

1995 to 2005

1995 to 2005

BG 15.1 14.6 14.6 16.1 18.0 19.0 1 16.2 - CZ 11.3 11.0 10.8 11.1 12.0 11.9 26 11.5 -0.3 EE 12.4 12.1 12.5 12.4 12.5 13.5 16 13.0 -0.4 LV 12.3 11.8 11.2 12.1 11.9 12.9 22 12.9 -1.2 LT 12.6 12.2 12.4 11.7 11.3 11.5 27 12.5 -0.9 HU 16.1 15.3 14.9 15.6 16.3 15.8 8 16.1 -2.0 PL 12.6 12.5 13.2 13.2 13.1 13.9 13 13.4 -0.3 RO - 11.4 11.7 12.5 11.8 13.0 21 12.1 - SI 16.3 16.1 16.4 16.6 16.4 16.4 5 16.3 0.5 SK 12.8 11.5 12.0 11.4 12.5 13.0 20 13.0 -2.1 EU-27 Weighted average 14.0 13.7 13.7 13.7 13.7 13.8 13.8 0.4 Arithmetic average 14.0 13.6 13.6 13.8 14.1 14.4 13.9 0.5

Source: Taxation Trends in the EU, 2007 – EUROSTAT.


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Indirect taxes as % of Total tax revenues Table 2

Average Difference

2000 2001 2002 2003 2004 2005 Rank in EU-27

1995 to 2005

1995 to 2005

BG 45.4 45.6 46.9 47.7 51.0 52.8 1 48.2 - CZ 33.5 32.3 31.1 31.0 32.5 32.9 24 32.9 -1.0 EE 39.6 40.2 40.3 39.4 39.8 43.7 8 39.2 7.1 LV 41.8 41.3 39.8 42.5 41.8 43.9 7 42.4 1.4 LT 41.8 42.6 43.8 41.7 39.8 40.0 13 42.4 -3.5 HU 41.8 39.5 38.8 40.6 42.1 41.0 10 41.0 -1.8 PL 37.1 37.2 38.5 39.4 40.1 40.6 11 38.5 2.4 RO - 41.0 41.4 45.3 43.3 46.3 3 43.4 - SI 42.2 41.4 41.8 41.9 41.4 40.5 12 41.5 1.1 SK 38.9 36.5 37.6 36.8 41.9 44.3 5 38.9 6.3 EU-27: Weighted average 34.4 34.3 34.8 34.8 35.0 35.0 34.4 1.2 Arithmetic average 37.6 37.4 37.7 38.2 38.7 39.1 37.8 1.8

Source: Taxation Trends in the EU, 2007 – EUROSTAT. Regarding the indirect taxes, it has to be mentioned that Romania is on the third place

in the EU, after Bulgaria and Cyprus, from the point of view of the percentage of indirect taxes in total fiscal revenues. Indirect taxes stand for 46.3% of the fiscal revenues, whereas the EU average was 39.1% in 2005. Corresponding to this level, the percentage of VAT in total fiscal revenues was the second at EU level, i.e. 29%(3). Also is important to remark the high percentage of indirect taxes compared with the GDP:

Romania – The structure of revenues from indirect taxes as percentage of GDP

Table 3 2000 2001 2002 2003 2004 2005

Indirect taxes - 11,4 11,7 12,5 11,8 13,0 VAT - 6,3 7,1 7,2 6,7 8,1 Excises and consumption taxes - 2,3 2,4 3,5 3,6 3,3 Other taxes on goods (including tariffs) - 2,3 1,6 1,2 1,0 1,0 Other taxes on production - 0,5 0,7 0,6 0,5 0,5

Source: Taxation Trends in the EU, 2007 – EUROSTAT. However this situation is not to worry about, given the fact that at EU level and

particularly in the new member states one can notice a significant shift from direct to indirect taxes, with the corresponding impact on their weight in the total fiscal revenues. This phenomenon is not that much the result of certain fiscal policies but the effect of fundamental economic factors reflecting the consolidation of market mechanisms and superior rates of growth at regional level.

II. The role of competent authorities in the proces of fiscal harmonization The fiscal authorities as well as the courts in Romania confronted with fiscal cases

will have to take into account the decisions of the ECJ, whose observation is mandatory for all member states, an obligation stipulated also in the Accession Treaty signed by Romania. The ECJ decisions are intrinsic part of the EU legislation and, moreover, are the only source for the interpretation of EU legal texts. The ECJ, which became operational in 1953, has


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pronounced, during more than 50 years of existence, a impressive number of decisions that are the basis of the interpretation and application of EU law. This new reality which Romanian judges are already obligated to take into account, creates a whole reference system to which all efforts of harmonization have to be related.

Furthermore, the ECJ can decide on the applicability or conformity of national laws with the EU legislation. Obviously, the ECJ can neither decide on the abrogation of a law adopted by a member state nor suggest its abrogation, the decision remaining to the national authorities. However, once the ECJ declares a law as not being conformed with the EU legislation or to the principles and the fundamental freedoms stated in the Treaty, every act of enforcing that law can attract either complaints from the affected persons or infringement procedures from the European Commission against the Romanian state(4). Such a situation occurred with the introduction by the Romanian government of the tax on the first registration of vehicles starting with 1 January 2007 (See Case Study)(5).

Obviously, beyond this notorious case, there is need for a long and systematic process for the Romanian courts to start observing responsibly the ECJ jurisprudence. Moreover, an even greater process will be needed for the adaptation of the behavior of Romanian fiscal authorities to the EU fiscal rules. Currently, one can notice certain inertia of the fiscal authorities that ignore, sometimes deliberately, the ECJ jurisprudence, relying on the court’s lack of efficiency in respect of the reference to EU cases.

The significant gap between the EU law and the ECJ jurisprudence on one hand and the Romanian authorities fiscal policies on the other, has been reduced to a certain extent through the programs of administrative cooperation and technical assistance during the pre-accession period and after 1 January 2007. Within the Ministry of Finance have been managed numerous framework programs and twinning projects, most of them financed with PHARE funds. The main objectives were:

• Completing the harmonization of the tax legislation and strengthening the fiscal administration (allocated budget of 1.2 mil. Euro);

• Capacity building for the presentation of the financial consolidated statements and the consolidated reports regarding the budget implementation (allocated budget of 0,7 mil. Euro);

• Re-evaluation of the VAT framework (allocated budget of 0.6 mil. Euro); • Fiscal control (allocated budget of 1.2 mil. Euro); • Development and implementation of the integrated solution for the IT system, part

of the IT Strategy of the Ministry of Public Finance (allocated budget of 10 mil. Euro); • Support for the Strategic Plan of the Ministry of Public Finance (allocated budget

of 15.5 mil. Euro) etc. All these programs and projects plus many others had an important role, reflected by

the amounts allocated as well by the objectives proposed. However, in many cases the expected results didn’t occur, which leaves a lot to be done in the direction ad fiscal administration reforms. The programs contributed in a very limited extent to increasing the effectiveness of the relationship between the fiscal administration and the taxpayers, communication and transparency remaining very poor. Some of the shortcomings occurred in the management of the programs of administrative cooperation and technical assistance are:

- the lack of a realistic evaluation regarding the concrete institutional drawbacks to which the reform should have been targeted;

- the lack of mechanisms for systematically motivating and involving the people in the fiscal administrations where the programs were managed (in many situations the Romanian public servants perceived the program activities as a burden added to their daily activities);


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- the high degree of formalism in the evaluation of project’s results; - the poor system of communication with the taxpayers, the indirect beneficiaries of

the administrative reform; - the poor transparency and the poor dissemination of information regarding the

projects which remained, the majority of them, unknown to the public and to the other institutions interested in the reform of the fiscal administration (although almost each project had among other objectives the dissemination of information regarding the process of fiscal harmonization and administrative reform).

These elements are worth to be noticed both in terms of the efforts directed towards harmonization and in terms of the long term efforts of the Romanian fiscal administration for increasing transparency and effectiveness in view of the objective of reducing the fiscal burden fro the Romanian taxpayer.

Study Case – The tax on the first registration of motor vehicles The tax on the first registration of motor vehicles, considered by the Romanian

government as an environmental tax, obliges the person registering a motor vehicle to pay a tax calculated according the type and the age of the car, the cylindree and the pollution norm. This tax and particularly its exaggerated level generated heated critique at national level and then from the European Commission who suggested in several occasions the elimination of the modification of the tax. The Commission considered that the concerned tax is against Art. 90 TUE(6) and against ECJ jurisprudence. The problems identified are related to the discrimination between second hand vehicles sold by Romanian citizens and the ones sold by the ones in other member states; furthermore, the level of the tax is higher than the residual value in the case of very old cars(7). In March 2007 the Commission started the infringement procedure which implied discussions and negotiations with the Romanian authorities. After 28 November 2007 started the second stage of the procedure which offered a maximum of two months to the Romanian government to comply with the Commission’s requirements, before the case would be brought to the ECJ.

Moreover, the commissioner for taxation and customs, Laszlo Kovacs, declared that the government would have not only the obligation to change the tax but also the responsibility to return the amounts paid unjustly. The commissioner gave the example of Hungary which was condemned by the ECJ following a similar situation. He emphasized that if the Romanian government would pass an emergency ordinance to modify the tax in order to bring it in line with the EU legislation, the infringement procedure would be abandoned but the amounts paid would still have to be refunded.

However, a technical problem to be found at the level of procedures in the case of an ECJ decision is that the decision will not be directly applicable to Romania citizens. Only the Romanian courts will have the right to decide on the specific cases, observing the relevant jurisprudence.

Notes (1) Shifting the balance - the evolution of indirect taxes - PriceWaterhouseCoopers, 2007 (2) For a theoretical approach regading the positive vs. negative integration see Fritz W.

Scharpf: “Balancing Positive and Negative Integration: The Regulatory Options for Europe”.

(3) Taxation trends in the EU –European Commission, 2007 (4) Art. 226 TUE.


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(5) The special tax for motor vehicles, introduced by Law no. 343/2006 and modified by the Emergency Ordinance no.110/2006.

(6) This forbids to every member state to apply directly of indirectly an excessive taxation on the products imported from another state. Art. 90 TUE forbids any fiscal discrimination that would create a comparative advantage to the products of a member state.

(7) The tax starts at 68 euro for new, very small cars and goes up to 8.586 euro for cars older than six years, with an engine capacity over 3.000 ccm.

Bibliography

Copenhagen Economics, Study on reduced VAT applied to goods and services in the

Member States of the European Union. Final report, June 2007 Cattoir, Ph., A history of the “tax package” - The principles and issues underlying the

community approach. European Commission, Brussels, 2006 Dăianu, D., Doltu, D., Pîslaru, D., Transpunerea în România a normelor Uniunii Europene

în domeniul impozitării indirecte. IER, 2002 European Commission, Proposal for a Council Decision authorising Romania to apply a

reduced rate of VAT to certain labour-intensive services referred to in Article 28(6) of Directive 77/388/ECC. Brussels, 2007

European Commission, Proposal for a Council Directive amending VAT Directive 2006/112/EC of 28 Novemeber 2006 on the common szstem of value added tax. Brussels, 2007

EUROPOLITICS, Friday 29 June 2007, No. 3337, 35th year Hamaekers, H., “Taxation Trends in Europe”, International Bureau of Fiscal

Documentation, 2003 Kovacs, L., “VAT reduced rates on the labour intensive services”, Speech at the conference

organised by the European Hotel, Restaurant, Coffee Association, Budapest, 19/01/2007

Martinez-Monga, C., Maza, Lasierra, L.A., Igal, J.Y., “Asset Booms and Tax Receipts: The case of Spain, 1995-2006”, Working paper (draft), DG ECFIN, July 2007

PriceWaterhouseCoopers, Global VAT developments. Issue 2, February 2007 PriceWaterhouseCoopers, Shifting the balance – the evolution of indirect taxes, 2007 PriceWaterhouseCoopers, The World Bank – Paying Taxes 2008. The Global Picture. 2007 Taxation and Customs Union DG, EC – Taxation trends in the EU, 2007 Wallace, H.; Wallace, W. & Pollack, M. A. – Policy-Making in the European Union. Fifth

Edition, Oxford University Press, 2005 www.eu2007.de – Germany, Presidency of the European Union www.eu2007.pt – Portugal, Presidency of the European Union


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DEVELOPMENT OF HIGHER EDUCATION IN ROMANIA

Ion PLUMB, Ph. D. Professor

Andreea ZAMFIR Ph. D. Lecturer


Abstract. Educational policies increasingly emphasise innovation and organisational change of educational institutions which are considered necessary to better align education and lifelong learning with the requirements of the knowledge society. Nowadays, higher education in Europe is undergoing extensive changes. It should play a strong role in raising the level of knowledge, skills and competences within the knowledge-based society and economy. Therefore, the paper presents the evolution of the Romanian higher education sector related to the Bologna Process and also a comparative analysis of the structure of higher education in Europe. In the end of the paper are presented some conclusions and recommendations for the further development of the higher education in Romania so that it might fully benefit of the new educational opportunities.

Key words: educational management; higher education; Bologna Process; economic

education; knowledge-based society. REL Classification: 4B, 4D.

1. Introduction The development of the knowledge society is raising demand for the key competences

in the personal, public and professional spheres. The way in which people access information and services is changing, as are the structure and make-up of societies. There is increasing concern about social cohesion and developing democratic citizenship; this requires people to be informed, concerned and active. The knowledge, skills and attitudes that everyone needs are changing as a result. The growing internationalisation of economies affects the world of work, with rapid and frequent change, the introduction of new technologies and new approaches to organizing companies. Employees need both to update specific job-related skills and to acquire generic competences that enable them to adapt to change. The knowledge, skills and attitudes of the workforce are a major factor in innova-tion, productivity and competitiveness and they contribute to the motivation, job-satisfaction of workers and the quality of work (Commission of the European Communities, 2005).

Higher education in Europe is today undergoing extensive changes: the European higher education area, the ultimate goal of the Bologna process, should be fully established by 2010. First-rate education and training are the best means of offering each citizen the means to integrate and participate effectively in society and professional life. The socio-


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economic barriers that may limit access to higher education must therefore be removed (Eurydice (b), 2007).

The Bologna Process is the product of a series of meetings of ministers responsible for higher education at which policy decisions have been taken in order to establish a European Higher Education Area by 2010. Since 1998, six ministerial meetings devoted to mapping out the Bologna Process have been held in different European cities, namely Paris (at the Sorbonne University), Bologna, Prague, Berlin, Bergen and London (Eurydice (a), 2007).

By May 2007, The Bologna Process extended to 46 signatory countries. The meeting held in London on 17 and 18 May 2007 focused on the recent developments of the Bologna Process in the different signatory countries. The changes in European higher education have attracted worldwide attention, hence the need to elaborate an external dimension strategy. Developments over the last two years have brought a significant step closer to the realisation of the European Higher Education Area (EHEA). Building on the rich and diverse European cultural heritage, all countries are developing an EHEA based on institutional autonomy, academic freedom, equal opportunities and democratic principles that will facilitate mobility, increase employability and strengthen Europe’s attractiveness and competitiveness. In a changing world, there will be a continuing need to adapt higher education systems, in order to ensure that the EHEA remains competitive and can respond effectively to the challenges of globalisation. In the short term, implementing the Bologna reforms is a significant task.

Bologna Process is more than mere convergence of policies set by public authorities only. Higher education institutions, staff and students all together, have made an impressive contribution to the implementation and will continue to define the shape of the European Higher Education Area.

2. The evolution of higher education in Romania The higher education structural reform in Romania taking place at the moment aims

to increase the mobility of the students, improve their chances on the labour market, reduce the number of university specializations and increase the participation in masters’ and doctoral programmes.

Romania has made major steps towards the European Higher Education Area by reorganizing the entire spectrum of university programs. A new higher education structure has been adopted by the Law 288/2004 on the organization of university studies, providing the legislative framework for the introduction of the three cycles, Bachelor, Masters’ and Doctoral studies, according to the Bologna objectives. The Law came into force in the 2005/2006 academic year and the first generation of Bachelor students will graduate in 2008.

Higher education in Romania is offered in both public and private higher education institutions. All higher education institutions are coordinated by the Ministry of Education and Research. Under the authority of the ministry there are agencies that play a very important role in fields such as financing and scientific research or partnerships with social and economic environment: The National Council for Higher Education Financing, The National Council for Scientific Research in Higher Education and National Agency for Qualifications in Higher Education and Partnership between Universities and Socio-Economic Environment (ACPART).

Having in mind the institutional structure, in Romania, at present time there are: - 56 state accredited higher education institutions (49 civilian state higher education

institutions and 7 military universities);


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- 29 private accredited higher education institutions; - 28 private accredited higher education institutions authorized to function provisory; - 6 post-university academic schools. The Academies are higher education institutions that prepare their graduates in a

certain specific domain (economy, music etc.) and Polytechnic Universities train students for technical domains of study. All legal acts apply in the same extend to public and private higher education institutions.

In Romania there is a Bologna promoters’ national team, organised on three fields of expertise: ECTS, Quality Assurance and the three cycle system. The members of the team have participated in European seminars and conferences, regional workshops, have produced information materials concerning the developments of the Bologna process, and have organised study visits in order to support with counselling the universities least advances in implementing the objectives of Bologna process.

Students unions are very committed to the objectives of Bologna process and the success of the reform in Romania. They are partners of the Ministry of Education and Research, participating in a monthly meeting with the representatives of the Ministry and discussing the main issues regarding the student support system in Romania and the restructuring of the degree system in order to increase the students’ employability.

Within the European practice, in order to evaluate the present stage of implementation of the Bologna Process, there is used a system of indicators with respect to the following criteria:

a. Degree system, including indicators: 1. Stage of implementation of the first and second cycle; 2. Access to the next cycle; 3. Implementation of national qualifications framework; b. Quality assurance: 4. National implementation of Standards and Guidelines for Quality Assurance (QA)

in the European Higher Education Area (EHEA); 5. Stage of development of external quality assurance system; 6. Level of student participation in quality assurance; 7. Level of international participation in quality assurance; c. Recognition: 8. Stage of implementation of diploma supplement; 9. National Implementation of the principles of the Lisbon Recognition Convention; 10. Stage of implementation of ECTS; d. Lifelong learning: 11. Recognition of prior learning; e. Joint degrees: 12. Establishment and recognition of joint degrees. The evaluation of the present stage of implementation of the Bologna Process in case

of Romania leads us to the following results for the above mentioned indicators: 1. In 2006/07 60-89% of all students are enrolled in a two-cycle degree system that is

in accordance with the Bologna principles; 2. All first cycle qualifications give access to several second cycle programmes and all

second cycle qualifications give access to at least one third cycle programme without major transitional problems;

3. A proposal for a national qualifications framework in line with the overarching qualifications framework for European Higher Education Area has been discussed with all relevant stakeholders at the national level and a timetable for implementation has been agreed;


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4. The process of implementing a national quality assurance system in line with the Standards and Guidelines for Quality Assurance in the European Higher Education Area has started;

5. A Quality Assurance system is in operation at national level and applies to all higher education institutions. The quality assurance system covers three elements: internal assessment, external review and publication of results. But no procedures are in place for peer review of national Quality Assurance agency according to the Standards and Guidelines for Quality Assurance in the European Higher Education Area;

6. Students participate at three of the four following levels: - In the governance of national bodies for quality assurance; - In external review of Higher education institutions and/or programmes: either in

expert teams, as observers in expert teams or at the decision making stage; - In consultation during external reviews; - In internal evaluations; 7. International participation takes place at two of the four following levels: - In the governance of national bodies for quality assurance; - In the external evaluation of national quality assurance agencies; - As members or observers within teams for external review of Higher education

institutions and/or programmes; - Membership of ENQA or other international networks; 8. Every student graduating in 2007 receive a diploma supplement (DS) in the

EU/CoE/UNESCO diploma supplement format and in a widely spoken European language automatically and free of charge

9. The Convention has been ratified; appropriate legislation complies with the legal framework of the Lisbon Convention; the later Supplementary Documents have been adopted in appropriate legislation and applied in practice, so that the five main principles are fulfilled:

- Applicants have a right to fair assessment; - There is recognition if no substantial differences can be proven; - In cases of negative decisions the competent recognition authority demonstrates

the existence of (a) substantial difference(s); - The country ensures that information on its institutions and their programmes is

provided; - An ENIC has been established. 10. In 2007 ECTS credits are allocated in all first and second cycle programmes,

enabling credit transfer and accumulation; 11. There are procedures/national guidelines or policy for assessment of prior

learning but they are used for only one of the abovementioned purposes; 12. Legislation allows and encourages establishing joint programmes and joint

degrees. A number of higher education institutions have already established joint programmes and are awarding nationally recognised degrees jointly with higher education institutions of other countries at all levels.

For each indicator there are scorecards from 5 (the best) to 1 (the worst), and each scorecard is associated with a colour like: green (5), light green (4), yellow (3), orange (2) and red (1). There are in figure 1 the scorecards obtained by Romania for the implementation of the Bologna Process.


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It is to mention that the key developments since 2005 in Romania include (Rauhvargers et al., 2007: pp. 73):

• Implementing legislation to define structured third cycle study programmes; • Creating the necessary preconditions for developing a system of post-doctoral

individual grants; • Extending the use of ECTS and diploma supplements; • Developing a quality assurance framework by establishing the Romanian Agency

for Quality Assurance in Higher Education, which applied for ENQA membership; • A new methodological framework for external evaluation of quality assurance; • A national agency for qualifications in higher education has been set up, with the

aim of developing and implementing a national qualifications framework.

0

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Source: Adapted from Rauhvargers et al., 2007: pp. 73.

Figure 1. Romania’s Scorecards for the Bologna Process Romania’s Progress Compared with Other Countries Table 1 presents the number of countries in each scorecard for indicators 1-12 and

outlines the position of Romania for each indicator.

Number of countries in each colour category for each indicator Table 1

Indicator Green (5) Light Green (4) Yellow (3) Orange (2) Red (1) 1 23 11 10 4 0 2 37 5 2 1 3 3 7 6 11 23 1 4 17 26 4 1 0 5 18 23 5 2 0 6 17 16 11 4 0 7 11 14 16 3 4 8 25 7 14 1 1 9 31 5 1 3 8 10 27 9 6 6 0 11 17 11 9 9 2 12 32 16 0 0 0 Source: Adapted from Rauhvargers et al., 2007: pp. 80.


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Based on data from table 1 we can calculate a weighted average of scorecards obtained by the 48 countries included in the Bologna Process. Table 2 and also figure 2 are presenting a comparison of Romania’s scorecards and the weighted average scorecards for the countries in the Bologna Process.

Weighted Average Scorecards and Romania’s Scorecards

Table 2 Indicator Weighted Average Scorecards Romania’s Scorecards

1 4.1 4 2 4.5 5 3 2.9 4 4 4.2 4 5 4.2 4 6 4 4 7 3.5 3 8 4.1 5 9 4 5

10 4.2 5 11 3.7 4 12 4.7 5

0,0

1,0

2,0

3,0

4,0

5,0

1 2 3 4 5 6 7 8 9 10 11 12

Average scorecards

Scorecards for Romania

Figure 2. Weighted Average Scorecards and Romania’s Scorecards

The main challenges for Romanian Higher Education are the following (Rauhvargers

et al., 2007: pp. 73; MEC, 2007: pp.22): − The establishment of the National Qualifications Framework, based on the learning

outcomes and described in terms of knowledge, competences and skills; − The separation of the higher education institutions: higher education institutions for

education, higher education institutions for research, higher education institutions for education and research;

− The passage from teaching to learning based education paradigm; − The assessment of all the higher education institutions and of all the study

programs; − Increase the funding for higher education, allocated in accordance with their quality; − The training of the trainers; − Increasing staff and student mobility by introducing portable grants; − The establishment of the Sustainable Development Education Strategy.


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Conclusions We must perceive the Bologna Process as providing a direction that is essential for

social development, but the culture of our universities is holding back the implementation of the process. Curricula tend to contain still theoretical knowledge predominating over practical learning. Therefore, there is a general and urgent need for a learning-oriented approach.

Higher education should play a strong role in fostering social cohesion, reducing inequalities and raising the level of knowledge, skills and competences in society. Policy should therefore aim to maximise the potential of individuals in terms of their personal development and their contribution to a sustainable and democratic knowledge-based society. The student body entering, participating in and completing higher education at all levels should reflect the diversity of the populations. The students must be able to complete their studies without obstacles related to their social and economic background. Therefore the efforts to provide adequate services for students, to create more flexible learning pathways into and within higher education, and to widen participation at all levels on the basis of equal opportunity must continue.

Some recommendations for countries are the following: to work towards fully implementing a national qualifications framework based on learning outcomes by 2010; to link the development of the qualifications framework to other Bologna action lines, including quality assurance, credit transfer and accumulation systems, lifelong learning, flexible learning paths and the social dimension; to ensure that progress is promoted across all action lines, including the more challenging aspects that are not easily and immediately attainable; to make formal links between the Bologna Process and the ENIC/NARIC network to undertake further work on developing and implementing national action plans for recognition.

Bibliography

Commission of the European Communities, “Proposal for a Recommendation of the European Parliament and of the Council on Key Competences for Lifelong Learning”, COM(2005)548 final, Brussels, 10.11.2005

Corbett, A., “Universities and the Europe of Knowledge. Ideas, Institutions and Policy Entrepreneurship in European Union Higher Education Policy, 1955-2005”, Houndmills: Palgrave Macmillan, 2005.

Eurydice (a), “Focus on the Structure of Higher Education in Europe 2006/07. National Trends in the Bologna Process”, Eurydice European Unit, Brussels, 2007

Eurydice (b), “Key Data on Higher Education in Europe, 2007 Edition”, Office for Official Publications of the European Communities, Luxembourg, 2007

Rauhvargers, A. et al., “Bologna Process Stocktaking Report 2007, Report from a working group appointed by the Bologna Follow-up Group to the Ministerial Conference in London, May 2007”, Department for Education and Skills, London, 2007

*** Bologna Process The Official Web Site 2007-2009, http://www.ond.vlaanderen.be/hogeronderwijs/bologna/


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*** London Communique, http://www.ond.vlaanderen.be/hogeronderwijs/bologna/documents/MDC/London-Communiqué-18May2007.pdf

*** http://www.ond.vlaanderen.be/hogeronderwijs/bologna/links/National-reports-2007/National_Report_Romania2007.pdf

*** “Romania National Report London 2007”, Ministry of Education and Research, 2007, http://www.edu.ro/index.php/resurse/7942

*** Bologna Process The Official Web-Site 2007-2009, http://www.ond.vlaanderen.be/hogeronderwijs/bologna/links/Romania.htm.


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DECISION PLATFORM - THE PUBLIC-PRIVATE INTERFERENCE

Ioana Teodora DINU

Candidate Ph. D. National School of Political Studies and Public Administration Abstract. This paper puts forward an adjusted model of decisional filtering through

focusing upon some analysis mechanisms of the defined framework. The selected area is far from being saturated, as the public sector has begun to have an orientation towards growth through innovation only in the past few years. My background pushes me towards adjusting private economy specific mechanisms to public economy structure, aiming to distinguish the administrative gaps. I believe it is necessary to have a clear vision, a well defined mission – that have always been very good exploited by the public sector –, but the emphasis on the input-output analysis is what assures a long term approach. Thus, it devolves the need to create a simple, flexible, and efficient system for the public resource allocation, to make public decision more efficient. In particular, it refers to the use of methods/techniques that are looking to assess the economic theories, to explain the economic principles through developing and applying quantitative and statistic methods, and also models that allow the processing of uncertain information, and that are not omitting the field’s institutional complexity.

Key words: public decision; management; innovation; public resource; efficiency.

1. Introduction The task of crinkling a mechanism – specific to private economy – on the public

economy structure is not at all new. The premises of this task have always been clear. Just like in a private corporation, the public system also works with people, objectives, deadlines and strategies, and this leads to the idea of the levity of private instruments’ application. The business strategy have been called many times an art that lacks balance, hinting at the bumper resources used to reach limited objectives. Consequently, the strategy of a public body could be called the art of flaw, due to its aim of using limited resources to accomplish many objectives. The difference between the two poles, public and private, is not necessarily related to the available quantity of money, but to the fact that a private corporation can limit its objectives according to its available resources, unlike a public body that has to be dedicated to objectives that most of the times are oriented towards social profit, not a financial one. Moreover, when we speak about a market we refer to an allocation mechanism, but, in the case of the government, it is easy to see that not only it has to choose a fair allocation in order to create public wealth, but it also needs to choose an efficient one.

The economic resources available to the public sector must be carefully and accountably managed, as the government has the noble task of estimating the public need for the goods and services being distributed or offered.


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2. Porter* aiting the public decision I believe it is very important for my analysis to follow zoom in stages, as it is

absolutely necessary to have a general view upon the environment creating the conditions or limiting the use of the applied mechanism. This macro analysis must attach to the public “industry” a certain organisation and behaviour type, one that suits it the best and that detects the proper decision making process, and leads to the sub-decisions from the micro analysis.

Taking into account the trend of focusing on public “industry” results and efficiency, it becomes natural to import an analysis model used by companies that are looking to penetrate a new market and want to cover the risks of such an adventure, through a deep knowledge of the business environment and, consequently, of the decision type that needs to be taken. These companies profile the industry, an action that helps them to define the strategy and the decision making process, and they often refer to Michael E. Porter’s Five Forces Model(1) (see appendix 1). Applying it on the present case, this model accurately captures the elements that affect the economic environment and the relationships between them. In the past few years, the scholars’ work in this field has shown the increasing importance of the role of Research and Development (R&D) in the economic growth. Being considered only a cost before, it currently appears to be a value creating investment, so that the necessity of innovation is more than clear. More and more, the public sector weighs its available resources, moves away from the arbitrary judgement and ex cathedra argument, the reason being that they became aware of the secret weapon of growth. The era of fait accompli and famous “sacred cows”, those projects lacking a proven social profitability imposed by public administrations, is long gone.

The threat of alternatives can be considered rather low, not from the viewpoint of a monopolistic thinking, but by realistically assessing the situation enforced by the public goods. A privately owned company visions the decision making system based on CSR – Corporate Social Responsibility – as the ultimate goal on the evolution scale, a development target. For this company, the financial profit comes first, and the social one can appear only as a result of a sustained real growth. The goods that the company deals with are divisible, which means that once consumed nobody can benefit from it any longer, so the quantity available to others has decreased. There are many alternatives to this issue. The threat of alternatives is absolutely vital in this case, and this powerful fight for profit created more and more rivalry. However, I am considering goods that are not divisible. The most known example is that of “defence”. The available quantity of “defence” is not divisible, meaning that the security that I feel does not diminish the “quantity” available to the others. The problem that arises is that, because it can be consumed without modifying the remained quantity available to others, it becomes a stimulus for not paying what you consumed – citizen’s power. The reference point becomes the consumer’s willingness to pay, according to the “consumer sovereignty” principle. The market mechanisms would never provide a social project. The markets certainly functions in terms of demand and supply, and those trying to satisfy the demand are looking to maximise their profit. Such a market, being of course a normal one, based on competition, would never succeed in providing Pareto type solution, meaning covering the demand of some without affecting anybody else – being it a “Pareto improvement”, i.e. the change makes at least one person better off, without leaving anybody worse off, or a “Pareto optimal situation”, when the systems reaches a certain level where it is impossible to make anybody better off, without leaving somebody worse off. Even like that, there is the power of supplier, that lies in the fact that the good is still an

* Refferal to Michael E. Porter


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economic one, scarce and desirable, and these features assures it the power of attracting payment in return for its use or consumption. In this regard, the supplier’s behaviour facing a decision should be emphasized. Three broad categories of behaviour paradigms may be distinguish for public decision making: “optimizing” behaviour, “satisficing” behaviour and “justificing” behaviour (Munda et al., 1993, p. 43). Though most of the decision making techniques are part of the first category, less of the second, in practice, they are often used as a mean to justify public decisions, even if these decisions are not in accordance with the optimizing and satisficing principles.

The barriers to entry actually hide the decision making system or, more precisely, the centralisation or decentralisation of the decision making systems. A decentralised decision making system relies on cooperation. If this cooperation is not stimulated, the decision making system can be damaged. Giving all these, the decentralised decision making system still has its advantages, due to the fact that it does not depend on the existence of a central decision making core that would be in charge of collecting and analysing the data. This type of operations becomes difficult on the account of proper technology deficiency which would allow an efficient allocation of available resources. A decentralised decision making system would appear as the ideal solution, but the government could find itself in a situation of decision making impossibility when these sub systems fail to cooperate. The problem of measuring the citizen’s power and willingness to pay perpetually revives, the result being a Pareto efficient allocation of public goods – that makes at least one person better off, without leaving anyone worse off.

As a result of these forces action, the rivalry comes into sight. The rivalry refers to the problems that need to be solved, to the issue of ranking them and, more importantly, to issue of choosing the right allocation of resources, keeping in mind the public interest, i.e. social benefit. Putting it simply, it is all about covering the distance from the present state to de desired one (Fiala, 1997). This is the moment when those having the mission of managing public resources – public managers – must prove responsible and fair when assessing the actual level of public demand for the provided goods and services. This rivalry creates many biases, the reason being the crucial parameters like decision maker competence, the constraint complexity, or the considered evaluation criteria. The mechanisms employed by the analysts in order to solve these issues – mechanisms that have become necessary as a result of the innovation mentioned above, and the lack of innovation would mean no real growth – are numerous, the basic condition being that they must be logically built, and accurately reflect the modelled reality. Their place in the decision making cycle has a special meaning, as it is the key moment of outrunning, or not, a bottleneck (see appendix 3).

3. Conclusion The decision of public resource allocation is a many-sided process that involves

considerable efforts in two directions: the first one is that of the assessment of the present state according to the budgetary constraints, the ius cogens legal framework, the evaluation mechanisms, the time frame, training, critical situations, decision making tools and communication; the second one refers to observing the differences that must be diminished to have an efficient resource allocation. This simulated framework, allowing the assessment of the state of public resource allocation, defined by me in terms of many variables – using a polar diagram (see appendix 2) – is what triggers the presented modelling. The mechanisms briefly presented (see appendix 4) as part of the decision making cycle will be analysed in a future paper, as they must be substantiated on precise data, accurately collected, and that bring more realism to their future application. But, mentioning them is important for clarifying the trajectory to be followed by the public decision screening out.


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As part of the decision making mechanism, the mentioned decision analysis take the form of certain authorisation models or public acknowledgement plans. The way the conclusions and recommendations should be presented is as important as the actual analysis. An overview must be clearly offered in order to satisfy the need of information of the decision makers. The shown evidence must not only be sufficient, but should also point to the right reasoning. For those whom are making the decisions, the analysis must be clear, so that they easily identify the reasoning evolution – Challenge Action Result.

The development of decision making techniques is an incredible one and very hard not to be noticed. To sum up, as a recognition of this development that today if giving us so many possibilities to innovate, we should not forget the starting block of these techniques, the first registered decision making method (Parton, 1846, p. 547), the one used by Benjamin Franklin who, when facing a decision making problem, wrote on one side of the paper the arguments in favour of the proposal, and on the other side those contrary to it. Then, by comparison, he eliminated all the arguments, pros and cons, having the same weight. What remained were those making the difference and determining the… decision.

Notes

(1) Michael Eugene Porter is professor at Harvard Business School. The Five Forces model was developed by him in 1979, using at first concepts from the Industrial Organisation Economics. The five forces nominated by Porter determine the competitive intensity and market attractiveness. Any modification inside these forces provokes a current position and strategy reassessment. The Five Forces model has become over the years a powerful tool for dissecting the business environment, helping the companies to clarify its strong points both in a certain situation, and after the strategy carried out. The model helps avoiding making bad decisions. The forces taken into consideration by Porter are:

Supplier power; Buyer power; Competitive rivalry; Threats of substitute products; Threats of new entrants.

This tool developed by Michael Porter firstly appeared in the article “How competitive forces shape strategy”, in Harvard Business Review, no 57, March-April 1979, pp. 86 – 93.

The classic model analyses an industry’s attractiveness and likely profitability. Over the years, it has become one of the most important tools for defining strategy. The model provides a real easiness in adapting it to different situations, giving the possibility to establish the forces’ ratio in a certain environment.

Bibliography

Munda, G., Nijkamp, P., Rietveld, P., „Information Precision and Multicriteria Evaluation Methods”, Williams, A., Giardina, E. (1993). “Efficiency in the Public Sector – The Theory and Practice of Cost-Benefit Analysis”, Edward Elgar Publishing, England, Great Britain, University Press, Cambridge, pp. 43

Fiala, P., “Models of Cooperative Decision Making” – Multiple Criteria Decision Making – Proceedings of the Twelfth International Conference, Haegen (Germany)


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Fandel, G., Gal, T. (Eds.) in collaboration with Hanne, Th. (1997), Lecture Notes in Economics and Mathematical Systems 448, Springer

Parton, J. (1846), Life and Times of Benjamin Franklin, vol. I. Mason Brothers, New York 1846, p. 547, in „Decision Making: Some Experiences, Myths and Observations” – Stanley Zionts, Multiple Criteria Decision Making – Proceedings of the Twelfth International Conference, Haegen (Germany)

Zadeh, L.A., „Fuzzy Sets”, in Information and Control, 8, 1965, pp. 338-53 Holland, J.H. (1975). Adaptation in Natural and Artificial Systems, University of Michigan

Press Goldberg, D. (1989). Genetic Algorithms in Search, Optimisation and Machine Learning,

Addison Wesley, Boston. Dorigo, M., Maniezzo, V., Colorni, A. (1996). The Ant System. Optimization by a Colony of

Cooperating Agents. IEEE Trans. On System, Man and Cybernetics – Part B, vol. 26 Dorigo, M., Maniezzo, V., Colorni, A. (1997). Ant Colony System: A Cooperative Learning

Approach to the Traveling Salesman Problem. IEEE Trans. On Evolutionary Computation, vol. 1

Antonio Alfonso, Ludger Schuknecht, Vito Tanzi, „Public Sector Efficiency – Evidence for New Member States and Emerging”, Working Paper Series no. 581, jan. 2006, ECB

„Emergent solutions for the information and knowledge economy”, Proceedings Vol.1, 10th SIGEF Congress, Leon, October 9-11, 2003, Cuervo, Cristina Mendana, Universidad de Leon

Bower, J.L., „Effective Public Management”, Harvard Business Review, martie-aprilie 1977, nr. 77201

Hughes, O.E. (2003). Public Management & Administration – An Introduction, ediţia a 3-a, PALGRAVE Macmillan

Lasserre, P. (2003). Global Strategic Management, PALGRAVE Macmillan Louviere, J. J., „Analyzing Decision Making. Metric conjoint analysis”, Series: Quantitative

applications in the Social sciences, SAGE University Paper, 1988 Matei, Ani (2003). Economie publică – Analiza economică a deciziilor publice, Editura

Economică Matei, Lucica (2006). Management public, ediţia a doua, Editura Economică Mintzberg, Henry, Managing Government, Governing Management, Harvard Business Review,

May-June 1996, reprinted 96306 Nicolescu, O., Verboncu, I. (1999). Management, ediţia a 3-a revizuită, Editura Economică,

Bucureşti Pelkmans, Jacques, Integrare europeană, Metode şi Analiză Economică, Institutul European

din România, ediţia a 2-a, 2003 Pollitt, Ch., Bouckaert, G. (2004). Reforma managementului public – Analiză comparată,

Editura Epigraf, Chişinău Simon, H.A. (2004). Comportamentul administrativ: studiu asupra proceselor de luare a

deciziilor în structurile administrative, Editura Ştiinţa, Chişinău Williams, A., Giardina, E. (1993). Efficiency in the Public Sector – The Theory and Practice

of Cost-Benefit Analysis, Edward Elgar Publishing, England, Great Britain, University Press, Cambridge

Witztum, A. (2004). Economics, Oxford University Press Sicodinet.unileon.es


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Appendix 1 – The adjusted Five Forces model

Appendix 2- Polar Diagram

Power of Supplier

Barriers to entry

Citizen’s Power

Rivalry

Threat of alternatives

Concept Design of Public Resources Allocation:

Polar Representation

Budgetary Constraints

Communication

Decision Making Tools

Critical Situations

Legal Framework

Evaluation Mechanisms

Time Frame

Training


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Appendix 3 – Supporting elements in the decision making cycle

Appendix 4 I. Fuzzy systems (FS) In 1965, Zadeh (5) wrote: „as the complexity of the system increases, our ability to

make a precise and yet significant statement about its behaviour diminish until a threshold is reached beyond which precision and significance (or relevance) become almost mutually exclusive characteristics” (incompatibility principle).

The traditional mathematical models are facing problems the moment they are used for analysing the uncertain and complex situations. These traditional models rely on the certainty of information, but the reality offers more and more situations of continuous change, and the public decision is by far this type of situation. The classic decision making tools lose their strength when it comes to dealing with subjective and fuzzy information. This was the reason for scholars to suggest the application of Fuzzy Sets Theory in the public decision making environment.

II. Expert Systems (ES) – are also used in the case of complex problems, for which it

does not exist a pre-established algorithm or there exists but it cannot be applied. ES are products of artificial intelligence that simulate an expert’s behaviour when solving a problem. These systems aim at simulating the human reasoning so that:

- They use norms and structures that contain specialists’ knowledge and experiences; - They logically infer conclusions; - They have the ability to interpret ambiguous data; - They allow the manipulation of knowledge influenced by probabilistic values. III. Genetic Algorithms (GA) – are methods based on genetic processes of the living

organisms, which are being used for solving optimisation and examination problems. They were firstly developed by Holland (1975), and later by Goldberg (1989), GA refer to the natural behaviour according to which the individuals are in a continuing competition with

Critical objectives

Strategic objectives

Decision script – framework, realities, targets

Original situation – starting point, known data

Short-term support – available methods of improving the original situation in order to make the objectives feasible

Expected Results

Fuzzy systems (FS) I. Expert systems (ES) II. Genetic algorithms (GA) III. Ant colony optimisation algorithms (ACO) IV.


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others from their species, so that the ones succeeding in surviving have bigger chances of generating a larger number of descendents, while the ones less gifted can create a smaller number of descendents.

IV. Ant colony optimisation algorithms (ACO) – reproduce the behaviour of ants. The

initiators of these studies are Dorigo, Maniezzo and Coloni (1996, 1997). These refer to the modelling of a nature system, in an approximate form, and imply an intelligent behaviour that gives good solutions for problems defined by many variables. Going in depth, the characteristic allowing the exploration of these colonies, in terms of solving a complex decision making process, is their way of finding the shortest distance from the ant-hill to the food, considering that the ants are blind. In their way, the ants evaporate a substance (pheromone) that they can smell – in this manner being able to return to the ant-hill – and that also allows the other ants to find the food. When an ant faces an obstacle, it decides to side step it in a probabilistic manner. After a while, the ants chose a single way, the one that has the most concentrated quantity of pheromone. This rode happens to be the shortest one, the high concentration of pheromone proving the fact that the ants have had time to cover it many times. The longer distance cannot keep such a concentration of pheromone because this substance evaporates. The continuity of the colony’s action allows the following of pheromones that point to a distance every time much shorter.


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INVESTING IN PEOPLE IN THE ACTUAL ROMANIAN LABOR MARKET

Mirela Ionela ACELEANU Ph. D. Lecturer


Abstract. Basic economic wise would argue that sustained per capita growth can not be achieved by investment and macroeconomic conditions only, if they are not supported by an increased level of technological progress and investing in people, enhancing the value of capital and labor force. In this sense, the shift from exploiting resources to exploiting knowledge is the milestone of the shift from cost-based competitively to value-based competitively. The economic and social growth are conditioned by the quality of work resources and by the productive and alocative efficiency of using them. The studies show that Romanian labor force has lacks in qualification therefore the educational system must be reoriented in concordance with the demands on the work market. On the other hand, the employment and social inclusion dimension of the Lisbon summit aims to define a comprehensive framework for ensuring that Europe will have a skilled, well educated and competitive labor force, which will be better able to adapt to change. So, Romania has to follow current European trend and to take into account the fact that the economy performances and the ability to stand against the international competing pressures are directly related to the quality of the human factor and to the structural modification of the labour force.

Key words: capital force; labor force; competitivity; market demands.

REL Classification: 4D, 8G, 12I, 20A

In the EU, the employment and social inclusion dimension of the Lisbon summit aims to

define a comprehensive framework for ensuring that Europe will have a skilled, well educated and competitive labour force, which will be better able to adapt to change. A major goal is to create the premises for the European economy to deal with the problems that might appear with the ageing of Europe’s population, with the impact this will have on budgets and, in particular, on the pension systems. The core message of the assessment is that an ageing population will translate into higher dependency ratios, as long as employment is not stimulated. The specific goals are to achieve a rate of participation of 70% for the population aged 15 to 64 years old, of 60% for women, and of 50% for older workers by year 2010.

At the same time, the Lisbon Agenda links the establishment of a skilled, well educated, flexible labour force to lifelong training and encourages people to enrol in higher education programs, and firms to train their employees. In parallel, an important objective of the Agenda is to modernize the European social protection systems, some of which risk to become unsustainable in long run and put additional pressures on public finances. The pension systems in particular have to be reformed in order to avoid deficits that drain significant resources away from other priorities such as investments in the human capital.

Investing in people includes investments in knowledge, skills and attitudes. One important ingredient of investments in people is considered to be investment in education. Educational and training have become crucial in the process dedicated to built a Europe of


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knowledge and a knowledge-based society. OECD works have confirmed the importance of investment in education as a determinant of economic growth.

The OECD has pointed out that four out of every five persons who will be at work in ten years time, are already at work, but that most of their skills will be obsolete by then. Thus the importance of continuous up-skilling of those at work must become a major issue. While employyers may see it as a cost, it is those companies which do not up skill their workforces which will not survive. There is a broad consensus on the importance life long learning and economic development.

Investment in human capital is what economists call investment in education because in the past, many economists only saw investment in plant and machinery as adding to economic growth. Growing recognition of the value of education has meant that it is now no longer perceived as a cost, but as investment in the future. It is one which will generate returns for the economy, for the firm and for individual workers.

Economists point out that future economic development will rely heavily on knowledge and innovation. Both will depend on the skills of people and so the education system, from pre-school to post graduate level is important, but the skill enhancement of those at work is equally, if not more, important.

For the employee, additional workplace training is useful for increasing their skills, job satisfaction and in time, their earning power. For firms, the way forward in meeting future challenges is to have the most highly skilled and motivated employees.

Better skilled workers will produce more output, will use computers, plant and machinery, more efficiently and the efficiency gains reduce unit costs, boosting productivity and competitiveness. Investment in training also increases the flexibility of the workforce and new products and processes are better used. Better trained managers make better and more informed decisions – also boosting efficiency. Better trained workers and managers can work partnership more effectively, with a better dialogue between them, with workers challenging managers in positive ways. Those employers who fear such challenges may not last too long in the knowledge-based economy where workers are better educated, demand more fulfilling employment and despise authoritarian management.

There are many reports which emphasise the importance of education and training. The two reports from the EU concluded that the adaptability of workers is one of the key challenges facing all of the European Unions’ economies and that lifelong learning must be a major priority. These studies show that Life Long Learning is a key input in addressing rapid technological change; raising labour market participation and reducing unemployment.

Romania does not excel in encouraging the development of a well-educated labour force. According to a recent survey, it has the highest percentage of early school leavers in the region, with 23% of the population between 18 and 24 leaving all forms of education, and the lowest percentage of life-long training. Only 1% of the population aged between 25 and 64 were participating in training over the four weeks prior to the survey. Expenditure on education is one of the lowest among CEEs countries. Long-term unemployment among recent graduates indicates a mismatch between the skills the education system provides and the labour market demand. The education system is undergoing a comprehensive reform, which has already produced significant changes, especially in compulsory educations.

For instance, beside EU countries, Romania is on the last places regarding population with tertiary education per 100 population (11,1% toward 22,8% - EU-25) and percentage of those that are participating in life-long learning per 100 population (1,6% toward 11% - EU-25).

Population with tertiary education per 100 population aged 25-64 Table 1

1998 2000 2001 2002 2003 2004 2006 EU25 -- 20,0 20,1 20,4 21,3 21,9 22,8 Finland 28,9 32,3 32,3 32,4 33,2 34,2 34,6 Belgium 25,3 27,1 27,6 28,1 29,0 30,4 31 Denmark 25,4 26,2 28,4 29,6 31,9 32,9 33,5


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Norway 28,5 31,6 34,0 33,9 31,3 32,3 32,6 Germany -- 23,8 23,5 22,3 24,0 24,5 24,6 France 20,1 21,6 22,6 23,5 23,2 23,9 24,9 Spain 20,1 22,7 23,7 24,5 25,2 26,4 28,2 Italy 8,8 9,7 9,8 10,2 10,7 11,6 12,2 Poland 10,7 11,4 11,8 12,5 14,1 15,6 16,8 Slovenia 14,4 15,9 14,4 15,2 17,8 19,0 20,2 Romania 8,7 9,3 9,8 9,8 9,6 10,6 11,1 Bulgaria -- 18,2 21,3 21,2 21,3 21,7 21,6 Hungary 13,1 14,1 14 14,2 15,4 16,7 17,1 Turkey 7,5 8,3 8,4 9,1 9,7 -- 9,7 USA 34,9 36,5 37,3 38,1 38,4 -- 38,4 Japan 30,6 33,6 34,1 36,6 37,4 -- 37,4

Source: European Innovation Scoreboard 2006 Database, European Trend Chart on Innovation, European Commission, 2006, http://trendchart.cordis.lu

Population with tertiary education per 100 population includes the number of persons

with age classes between 25 and 64 years. Even the number of population with tertiary education has increased in the last years

in Romania; the percentage of those in ratio with the total population is extremely low as against the other analyzed countries.

In Romania, the dynamics of unemployment affects the overall labour market participation. Although in Romania open unemployment has emerged inevitably as a consequence of enterprise restructuring and output contraction, in recent years it appears to have stabilized at around 7-8% of the labour force. This is less than the EU average. This relatively low unemployment level can be partially attributed to the limited restructuring that took place in the enterprise sector. At the same time, the decline in employment has not been matched by a proportional rise in unemployment, as long unemployment spells discourage people from actively looking for jobs, and pushes them out of the labour force or into subsistence agriculture. The large informal economic sector, estimated at around 20% of GDP, may also explain the low formal employment figures and the low unemployment paradox. The grey economy appears to provide a large number of low paid jobs to (mostly unskilled) individuals who cannot find formal employment. On the other hand, the important number of workers who found jobs abroad lowers dramatically the real unemployment figure. So far, only a few of those who work abroad are officially registered as workers. Many of them are still considered unemployed in the official domestic statistics.

Despite their highest unemployment rates, we would say that the structure of the economy tends to favor qualified workers, those with average and specialized technical education, a group whose share in both active population and in employment increased steeply. But, in 2002, only less than 80% of the working population with tertiary education have a position corresponding to their educational attainment.

Romania has already started a reform programme needed to promote increased participation to the labour markets. The robust economic growth, expected over the next few years, should make job creation easier, and the declining trend in the participation rate should be reversed. But, in addition to promoting growth as a means to increasing employment, Romania needs policies targeted at the most vulnerable categories of workers. Women and older workers, in general, are less likely to find jobs. The promotion of non-discriminatory legislation, without any consideration being paid to the enforcement, as it currently happens in Romania, does not help.

The quality and skills of the labour force should be upgraded, by encouraging people to enrol in higher education programs and lifelong learning. Education institutions should conduct studies to identify match and mismatch situations and reorient profiles, study streams, and curricula, in order to create an educated labour force with the right qualifications. The unemployed should be stimulated to undertake training in order to update or even change their skills. This requires an increase in the budget devoted to active labour market programs, towards EU levels.


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The current percentage is too small, especially since studies have found that training and retraining, small business consultancies and assistance, and employment and relocation programs increase the chances of the participants to find employment and reduce the likelihood of receiving unemployment benefits. In the same time, firms should be encouraged through fiscal incentives to invest in their workers, by upgrading their skills through on the job training or lifelong education.

Education is a continuous process, which does not stop after the school age period. Constant training is the key to progress in a global world, which changes at an incredible speed.

In Romania, participation in life-long learning per 100 population is very small (only 1,6%) toward EU-25 (11%).

Participation in life-long learning per 100 population aged 25-64 Table 2

1998 2000 2001 2002 2003 2004 2005 2006 EU25 -- 7,9 7,9 8,0 9,3 9,9 10,8 11 Finland 16,1 19,6 19,3 18,9 25,3 24,6 24,8 24,8 Belgium 4,4 6,8 7,3 6,5 8,5 9,5 10 10 Denmark 19,8 20,8 17,8 18,4 25,7 27,6 27,6 27,6 Norway -- 13,3 14,2 13,3 19,4 19,1 19,4 19,4 Germany 5,3 5,2 5,2 5,8 6,0 7,4 ... 8,2 France 2,7 2,8 2,7 2,7 7,4 7,8 7,6 7,6 Spain 4,2 5,0 4,8 4,9 5,8 5,1 12,1 12,1 Italy 4,8 5,5 5,1 4,6 4,7 6,8 6,2 6,2 Poland -- -- 4,8 4,3 5,0 5,5 5 5 Slovenia -- -- 7,6 9,1 15,1 17,9 17,8 17,8 Romania 1,0 0,9 1,1 1,1 1,3 1,6 1,6 1,6 Bulgaria -- -- 1,4 1,3 1,4 1,3 1,1 1,1 Hungary 3,3 3,1 3,0 3,2 6,0 4,6 4,2 4,2

Source: European Innovation Scoreboard 2006 Database, European Trend Chart on Innovation, European Commission, 2006, http://trendchart.cordis.lu

Education is important not only for supplying researchers, but also for providing

knowledge to entrepreneurs. The innovative behaviour of entrepreneurs can be stimulated through business education, in fields such as entrepreneurship, management, marketing. The appetite of the innovation drivers for developing their businesses is strongly influenced by their ability to think strategically and act in a professional way.

So, Romania has to follow current European trend and to take into account the fact that the economy performances and the ability to stand against the international competing pressures are directly related to the quality of the human factor and to the structural modification of the labour force.

Bibliography

Michael, Mlady, „Regional unemployment in the European Union, Bulgaria and Romania in

2005”, General and Regional Statistics 1/2006, htpp://epp.eurostat.ec.europa.eu Suciu, Marta Christina (2000). Investiţia în educaţie, Editura Economică, Bucureşti *** European Innovation Scoreboard 2006 Database, „European Trend Chart on

Innovation”, European Commission, 2006, http://trendchart.cordis.lu *** Grupul de Economie Aplicată & Centrul Român de politici Economice, “România şi

Agenda Lisabona”, www.gea.org.ro *** OECD Statistics, www.oecd.org


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EMPLOYMENT AND LABOR MARKET POLICIES FOR AN AGEING WORKFORCE

Alina Ştefania CREŢU Ph. D. Candidate Assistant

Roberta CALINICI PhD. Candidate Assistant

Academy of Economics Studies, Bucharest

Abstract. Over the last few years the problems of the ageing workforce have become of increasing concern to policy-makers and the main actors involved at European level, especially starting with year 2000, by the adoption of the EU Directive on equal treatment in employment and occupation for all people irrespective of a range of factors, including age.

As a new member state to the European Union, Romania is undergoing the aligning process of the national legislation at the EU regulations and the application of the measures/practices regarding the ageing workforce. 33 % of the inhabitants of Romania were aged 50+ in 2006 (EU-25: 35 %). The employment rate of the older generation (50 - 64) amounted 47.5 %, which was lower than the European average (EU-25: 51.9 %), too.

The problems of the ageing workforce have been taken into account starting with the period of the “big” restructuring of the Romanian industry (during the 1990s there were collective redundancies in mining and the metallurgic industry) when the unemployment rate was very high and the unemployed people over 45 years have become gradually long term unemployed, being unable to reintegrate into the labor market. Furthermore, the employers, in the same period, preferred to hire younger people to the older ones, due to the lower costs of the young workforce and their assessed higher ability to face the job requirements (i.e. abilities in using new technologies - including computers and IT, the availability of working long hours, the resistance to working conditions such as stress, hard working conditions etc.).

This tendency may still be observed. This is why older persons choose to retire, even earlier. Older workers are experiencing more long-term unemployment and get less training than younger ones. The Romanian government took the first steps by drawing up two National Employment Plans (PNAO): PNAO 2002-2003, PNAO 2004-2005 and PNAO 2006-2007.

Key words: unemployment rate; labor market; active labor force.

REL Classification: 12I

Role of public actors in fostering active ageing in Romania No Romanian public organization has a specific role in fostering active ageing. The public

actors are involved in the field of employment, health, work security or in the social field but in general have as an objective the reduction and elimination of any kind of discrimination.

Nevertheless, they included in their strategies, programs or activity some measures regarding the ageing workforce.

Thus, we can mention here the government which stipulates in its Program in Chapter 7 – The Social Protection Policy that one of the active measure in this field will be the “Promotion of some special program in partnership in order to diminish long term unemployment affecting youngsters and persons over 45 years as well as persons that are facing integration difficulties”.


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The National Employment Plan 2006 - 2007 included some important measures concerning old and ageing workforce such as:

_ stimulation of employers to hire persons of 45 years of age or older, according to the law 76/2002 (art. 85);

_ designing of long term, specific schemes aimed at updating and changing old or ageing workforce’s focus on the labor market; at the same time, besides subsidies granted to the employers who create new jobs for the unemployed persons of 45 years of age or older, there were other measures taken according to the same law such as job related information and consultancy given in order to increase the chances of finding new jobs for these persons;

_ designing new legislation in order to create a more favorable environment for the adults professional training: adult professional training providers, authorization, setting up of new occupational standards, evaluation and certification of the professional competencies gained by adults through continuous professional training;

_ improving the new Labor Code by including specific measures concerning employees’ professional training.

To comply with its overall mission, Ministry of Labor, Social Solidarity and Family undertakes a series of responsibilities, which consist of:

_ Strategic aspects: it ensures the conception of strategies to implement the Governmental Program in the field of labor, social protection and solidarity, and family policies;

_ Regulatory aspects: the conception of the normative and institutional framework necessary to fulfill strategic objectives in the given field of activity (labor, social solidarity, social protection and family); adoption of the EU acquis into the national legislation pertaining to its field of activity (social insurance and special laws; labor legislation);

_ Managerial functions for the operational program concerning employment and social policy;

_ Domestic and international representation of the Romanian state in the given field of activity (European affairs and international relations) – cooperation with the similar institutions from European countries and all over the world;

_ State authority securing the monitoring of a unitary implementation of and compliance with the law, and overseeing the activity of the institutions under its supervision or in coordination with Ministery of Labor, Social Solidarity and Family. The Ministry also monitors compliance with responsibilities assigned to the main authority for payment and receipt of public money; the aforementioned responsibilities are delegated, according to the law, to the Executive Directors of the National Agency for Employment and of the National House of Pensions and Other Social Insurance Rights, respectively.

The Common Paper on Employment Policies Evaluation and The Human Resources Development Strategy included in National Development Plan 2004 - 2006 pinpoint, within Priority 3 - Human Resources Development, ‘active fight against social exclusion’ as an important objective.

The main objectives of the National Agency for Employment (NAE) and the County Agencies for Employment are:

_ Institutionalization of the social dialogue in the field of employment and professional training;

_ Implementing of the employment and professional training strategies; _ Implementing of the social protection measures for the unemployed persons. In order to accomplish its objectives, the NAE has the following functions: _ to organize the employment services; _ to organize, deliver and finance, according to the law, the vocational training

services for unemployed people; _ to direct the unemployed people and to mediate between these people and the national

employers, in order to balance the offer and the demand on the national labor market; _ to manage the budget of the unemployment insurance fund;


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_ to initiate proposals for legal regulations and submit them to the Ministry of Labor, Social Solidarity and Family;

_ to implement programs financed by the European Social Fund. Both ministries, Ministry of Labor, Social Solidarity and Family and the Ministry of

Health, have jointly drafted the ‘Policy and strategy for Romania in the field of health and safety for the period 2004 – 2007’.

The National House of Pensions and Other Social Insurance Rights (CNPAS) was created in 2000 and (starting with January 1, 2005, in accordance to the Law 346/2002, modified and completed by the Government Emergency Decision 129/2004 and the Law 57/2005) enlarged its field of activity to cover work accidents and occupational diseases insurance.

A particular situation in Romania, not very often found in Europe, is that the National Fund for Accidents and Occupational Diseases has been created under the authority of the National House of pensions. Moreover, the National Institute for Medical Evaluation and Recovery of Work Capacity has been built also under this National House of Pensions and Other Social Insurance Rights. The fact that both, the Institute and the National Fund are under this pensions’ house does not allow them to exercise their autonomy in the field of promoting health and safety at work.

Public initiatives for promotion active ageing. The discrimination issue – anti

discrimination measures The most important legal regulation regarding the fighting against discrimination is

the Law no.27/2004 regarding the approval of the Government Ordinance no. 77/2003 which modifies and completes the Government Ordinance no. 137/2000 regarding preventing and penalizing all forms of discrimination.

In Governmental Ordinance no. 137/2000 the definition of discrimination criteria was incomplete. This is why it was approved the Governmental Ordinance no. 77/2003 which gives a more comprehensive definition of discrimination, including the age criterion. Government Ordinance no. 77 of August 28, 2003 reads in Article 2: ‘(1) According to the present Ordinance, discrimination is considered any difference, exclusion, restriction or preference, based on race, nationality, ethnic, language, religious, social category, credo, gender, sexual orientation, age, disability, non-contagious disease, AIDS or disadvantaged category criteria, which have like scope or effect the restraint or dismissing of the recognition, of the usage or exercise, in equality conditions, of the human rights and the fundamental freedom or of the legal rights, in political, economic, social and cultural or in any other public life field.’

There was elaborated the National Plan for Fighting against the Discrimination 2002 - 2006 and in the Chapter IX General Actions the setting up of the strategies on different sectors such as the strategy regarding preventing and fighting against the discrimination based on age criteria (young, ageing people) is mentioned.

Social security/pension system In 2005, the order of the minister of labor, social solidarity and family 46/2005

approved the Law 19/2000 on public pensions system and other social insurance rights, including the subsequent modifications and additions. According to the Law no. 19/2000 regarding the pension public system and other social insurance rights (section 1), pensions for legal retirement age are granted as follows (art. 41):

1. The pension for legal retirement age is conceded to the insured persons who cumulatively observe, at the retirement date, conditions regarding the legal retirement age and the minimum contribution stage at the public system.

2. The legal retirement age is 60 years for women and 65 for men. These legal retirement ages will be gradually implemented during the next 13 years by increasing the retirement age from 57 years for women and 62 for men. (see Appendix).


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3. The minimum contribution stage is 15 years for both women and men. The minimum contribution stage will be gradually increased from 10 to 15 years during the next 13 years from the date the law came into force.

4. The complete contribution stage is 30 years for women and 35 for men. These complete contribution stages will come into force gradually during the next 13 years, starting from the actual stage of 25 years for women and 30 for men.

As for the anticipated pensions, art. 49 of the law (law no. 19/2000) stipulate that: 1. Persons who pay social insurance and have 10 years over the complete stage of

contribution can apply for an early pension no more than 5 years before the standard pension age. 2. The early or anticipated pension’s amount is established in the same way as for the

age limit pension. Article 50 of the sane law, regarding the partial anticipated pensions, stipulates that: 1. Persons who pay social insurance and have completed the contribution stage as

well as those who have 10 years over the complete stage of contribution can apply for partial anticipated pension by shortening with no more than 5 years the standard pension age.

2. The partial anticipated pension quantum is established by diminishing the quantum for standard pension age in accordance with the contribution stage and with the number of months which reduce the standard pension age.

It is already well known that the rapid demographic transition (due to life expectation increase) and the fertility decline led to a rapid increase of the elderly within the total population. From this perspective, the complex reform of the Romanian social insurance system took place with a view to implement the best possible measures able to ensure a decent living standard and safety for the elderly, as well as proper health services.

The public pension system (and other social insurance benefits) has always been and still is a main issue for the Romanian policy-makers.

Recent trends proved the necessity of a rapid reform of the social insurance system and the next step would be the completion of a legislative and institutional framework by carrying on a systemic reform leading to the creation of a complex pension system based on more components.

Once Law 19/2000 (on public pension system and other social insurance benefits) came into force, the Romanian government started the above-mentioned reform. The public pension system is the first component of the multi-pillar state guaranteed system, based on a re-distribution principle. It is seen as a modern regulation, consistent with the European legislation.

The new legislation (on public pension system and other social insurance benefits) provides, as a priority, the increase of social insurance budget financial sustainability, by growing incomes and lower expenditures. The increase of the income will be realized by an

− increased degree of social insurance contribution collection; − increase of the minimum collection stage; − increase of the standard minimum retirement age. The decrease in the general level of the expenditures of the consolidated budget will

be achieved through the: − decrease of the number of unemployed persons; − decrease of the unemployment allowance paid by the Unemployment Fund; − increase of the standard minimum retirement age. The pension system reform primarily aims at adopting and implementing some measures

with a view to fully cover inflation influencing pensions as well as to eliminate all unbalances and/or inequities between pensions levels granted according to previous legislation.

The basic principle of the multi-pillar pension system is to settle a diversity of pension incomes financing resources by involving both the public and the private sector. Beside the above-defined benefits scheme, based on re-distribution and solidarity among generations, different schemes based on capitalization (defined contributions to pensions funds, privately administrated) will also be put in place.


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The advantages of a multi- pillar pension system are: − it creates the opportunity of higher pension levels than that in the unique, re-

distributor system; − it enables a long term financial sustainability of the pension system and an equal

treatment for all contributors; − it leads to significant capital employed in internal market, positively influencing the

economic growth rate and, as a consequence, the living standard of the population. − Recent strategy in social assistance focused on permanent updating of benefits’ level for

those in most disadvantageous conditions, and on improving and implementing new programs able to ensure an effective social protection for groups with a major social risk, especially for elderly.

− The main goals in the field of social assistance of the elderly at national level according to the government Program refer to:

− developing the social assistance system capacity of providing social services for vulnerable groups;

− encouraging efforts for re-organization and rehabilitation of elderly care institutions;

− providing institutional support with a view to develop and diversify proper social services for vulnerable groups;

− organizing community services able to face needs identified at local level. Conclusions The governmental policy regarding the human resources development has, as priorities,

measures that sustain the young people, both young unemployed people and young university graduates as well as measures to develop entrepreneurial abilities of the young people: see the Operational Plan for Employment and the National Development Plan.

In Romania there are few measures regarding the ageing workforce and these are only for stimulating the employment of the 45+ by governmental subsidies given to those employers who hire people over 45 years old (Law 76/2002).

The companies and organizations generally apply the same employment policy as the government. There are few companies that hire ageing or older workers and if they do so this is to be attributed to the subsidies received from the government and not because they consider it useful to hire experienced people.

Although the legislation forbids discrimination against age, young people are still preferred because the wages are lower for young, inexperienced employees than for the older and experienced people. Furthermore, the companies’ owners think that it is harder for the older employees to adopt themselves to the changes, especially to new technologies.

It is also true that a part of the 45+ generation has a certain mentality inherited from the communist period, which influences them and makes them reluctant to change. The collective restructuring policies had a considerable impact on the ageing workforce. A large number of skilled persons with very much experience in their field and used to have a secure job had been in the situation of being unemployed, unable to support their families and getting the feeling of uselessness. For these people a solution was earlier retirement, if this was possible (as an alternative to unemployment).

Besides, redeployment is not so easy for the ageing and older persons, if there are not special measures for that. Moreover, the training and re-qualification programs are mainly designed for young persons or, at best, for all age groups, irrespective of their age, with no specific focus on the older workforce.

The legal procedures and practices regarding work protection and security are general, no specific measures being designed, yet, for the ageing workforce. Nevertheless, at company level, there were some private initiatives focused on employees’ training, including the older ones, i.e. the experienced employees being used as on-the-job trainers for the young persons.


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Ergonomics and job design have not been used in a sufficient extent until now, although some companies took some steps in implementing these measures.

It is becoming common to apply for advice from a company specialized in human resources development in order to hire and evaluate new employees rather than for implementing measures designed to improve the efficiency of the workforce. It is considered necessary to set up and develop consultancy and counseling centers for over 45 years old persons, for either professional re-conversion, finding a new job, remaining on the labor market for a longer period (as the retirement age was raised) or for coping with the new retiree status.

Appendix The pension standard ages and the minimum and the complete stage of contribution

for women and men, on April 2001–March 2015 period

Women (Femei) The period (Perioada) The age of the women at the

retirement times years/months. (Vârsta asiguratei la ieşirea la pensie ani).

The complete stage of contribution years (Stagiul complet de cotizare ani)

The minimum stage of contribution years (Stagiul minim de cotizare ani)

april 2001-march 2002 57 25 10 december 2006-march 2007 58 26 11 december 2010-march 2011 59 28 13 December 2014-march 2015 60 30 15 Men (Bărbaţi) The period (Perioada) The age of the men at the

retirement times years (Vârsta asiguratei la ieşirea la pensie ani)

The complete stage of contribution years (Stagiul complet de cotizare ani)

The minimum stage of contribution years (Stagiul minim de cotizare ani)

april 2001-march 2002 62 20 10 december 2006-march 2007 63 31 11 december 2010-march 2011 64 33 13 December 2014-march 2015 65 35 15

Source: www.cnpas.org

Bibliography

National Employment Plans (Planuri Nationale de Actiune pentru Ocuparea Fortei de Munca - PNAO)

Ministry of Labor, Social Solidarity and Family National Agency for Employment The Ministry of Health (MS) The National House of Pensions and Other Social Insurance Rights (CNPAS) General Divisions for Social Assistance (GDSA) Trade Union organizations Employers’ associations (Government Decision 503, Law 356) Labor and Prosperity FOUNDATION – BRAILA, Law 21/1924 The National Institute for Medical Evaluation and Recovery of Work Capacity Law 109/1997 amended by the Law 58/2003, Legea nr. 492/2001 for creating the Economic

and Social Council (Consiliul Economic şi Social, CES) The National Commission on Gender Equality – CONES Law 501/2004 (OJ 1092/24.11.2004) for approving the Government Ordinance 84/2004 for

modifying and completing the Law 202/2002 on gender equality.


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EUROPEAN TRENDS IN THE CONFIGURATION OF ENTREPRENEURIAL CULTURE IN ROMANIA

Mircea Alexandru DINU

Candidate Ph. D. Academy of Economic Studies, Bucharest

Abstract. The present essay sets out to present a picture of the potential for development

of Romanian entrepreneurship. The referential frame is multi-layered, with multiple interdependencies, starting with the situation of the national economy, moving on to the European frame and the convergence towards the single market and ending with the influence exerted by the phenomenon of globalization at the level of the world market. The study of entrepreneurship as a phenomenon sees a growing interest with the rise of Asian economies (especially in China and India) and with the perceived rivalry between the great markets of Europe and the US. In the case of the emerging economies of China and the Indian sub-continent, the rising of the entrepreneurial culture represents the next logical and necessary step in development, with the perspective of creating a new model of economy starting from scratch. In the case of the developed economies of Europe and America the spotlight falls on the differences between the two, with North America as the exponent of the mature entrepreneurial culture as the basis for success and with Europe as the still forming alternative. The role of Romania is as a part in the creation of this European alternative to the “American dream”. The European project of integration seeks to insure peace and wealth in the old world, and one of the ways mentioned by the European Council is that of encouraging entrepreneurship, the aim being the creation of a system similar to the one on the other side of the Atlantic. Obviously this process will have to take into account the local flavors in Europe, with marked differences between the cultures on each side of “the pond”. Furthermore, the single European market is still not homogenous, with vast economical and social discrepancies between the post-communist East and the post-capitalist West. Arguably, Romania may find itself in an advantageous position for creating a dynamic economy and entrepreneurial culture, having successfully completed the transition to a market-economy and being at the beginning of the transition toward the European single market.

Key words: entrepreneurship; venture capital; SME; culture; education.

1. Introduction

The vision of the importance of entrepreneurial culture as part of economic progress was not always shared by the world’s main economies. In fact, the propensity for entrepreneurship was considered more of an American cultural peculiarity. The causes of America’s wealth are many, owing to its large territory, its resources and certainly not least to the strategic political and economic position it has gained following the Second World War. The developed states of the world have achieved a similar level of advancement in welfare, though no national economy has managed to approach the dimension attained by the American giant. But once the European Union and the European single market were created, the premises for creating a comparable economical space to that across the ocean have been met.


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Even though different in their mode of creation and as a political system - the EU is first an economic union converging toward at most a confederation while the US is a federation and a huge market - there are many who succumbed to the temptation of comparing the two economies and systems, with Europe as a counterweight or even a new version of America. One of the contrasts highlighted in these comparisons is that of entrepreneurship and entrepreneurial culture. It is an already notorious fact that from among America’s first 500 companies the majority did not exist 50 years ago, while the largest part of Europe’s first 500 were already extant, some even going back to the beginning of the century. Entrepreneurship therefore has a huge potential for growth which is not yet tapped by the old continent.

Bellow I will try to draw out a few of the defining elements in the formation of the European and Romanian entrepreneurship.

2. What is entrepreneurship and why is there a need for it?

From among the multiple definitions of the entrepreneur, I believe the most simple and illustrative is that for the one willing to undertake a risky venture, the road-opener. And even though some descriptions of the entrepreneur exclude the appetite for risk(1) the majority agrees on the fact the he is an innovator.

The importance of the entrepreneur in the economy is given by his role as an arbiter, being the one who by willing to bear the uncertainties of the market unsettles its static equilibrium, bringing it into a new, superior balance.

This is very clearly seen in the U.S.A., where the entrepreneurial phenomenon is truly prolific. In places like Silicon Valley creating a start-up company (mostly in technology and usually by young graduates) is almost a local tradition. This is reflected in the annual statistics: 3200 American SMEs have revenues exceeding 100 million euros as opposed to only 2000 of them in Europe(2).

Another eloquent example can be seen in Asia, in the two former colonies incorporated by China in 1997 and 1999: Hong Kong and Macao, respectively. The laissez-faire politics initiated under the British rule in Hong Kong (to be preserved by China until 2047) lead to the creation of at least 300,000 SMEs, active in various domains. These have given birth to over 170,000 joint ventures only in mainland China, employing a work force of around 10 million people(3). By contrast, the interventionist politics applied in Macao starting with 1981 has resulted in the creation of low-volume producers of low-technology products (artificial flowers, ceramics, clothing etc.)

In Europe, in the period of rebuilding after the Second World War large enterprises were viewed as the only ones able to amass the necessary resources for development. In truth, these were offering higher wages and had easier access to capital resources. The access to capital was initiated by the German model, where banks have accepted the debt for equity swap on a large scale in order to save the economy from the domino effect of default. This lead to a tight relationship between the large organizations and the financial world, with financial institutions becoming large stockholders and members on company boards. SMEs were seen as inefficient forms of organization, offering lower wages and with reduced prospects for development: the leading philosophy at the time being that of the “economies of scale”. Thus, European states looked to support and protect the large companies in strategic areas such as transports, energy, communications and others through the creation of monopolies or oligopolies. These became the engines of the economy, or “national champions”, employing a large workforce and generating prosperity and security for society as a whole.

Things began to change starting with the 1970’s together with the phenomenon of globalization and with the growing importance of the knowledge based economy(4). This has resulted in larger investment in marketing and innovation as a result of increasing competition. SMEs could now benefit from the vital developing space which they needed (with services becoming their most successful domain).

According to the European Commission, in 2003 the EU had 19.3m registered SMEs (including EEA and Switzerland) employing 140m people (Table 1). But, although the number of


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SMEs is similar in America and Europe (Table 2), studies by the European Commission indicate that only one third of SMEs set out to achieve growth while as much as 40% only look to survive on the market or at most try to consolidate their business. Now, the comparison mentioned earlier between the age of the first 500 companies in Europe and America can be seen in a whole new light.

SMEs and large enterprises in Europe-19, 2003 Table 1

SME Large Total Number of enterprises Employment Occupied persons per enterprise Turnover per enterprise Share of exports in turnover Value added per occupied person Share of labor costs in value added

(1 000) (1 000) Million € % € 1 000 %

19 270 97 420 5 0.9 12 55 56

40 42 300 1 052 319.0 23 120 47

19 310 139 710 7 1.6 17 75 52

Source: European Commission.

Enterprises and employment in non-primary private enterprise, USA, Japan and Europe-19

Table 2 Europe-19 (2003) USA (2000) Japan (2001) Occupied persons per enterprise 197 6 8 SME (1 000) 19270 21164 4690 Micro 17820 19988 N/A Small 1260 1009 N/A Medium 180 167 N/A Large 40 59 13

Source: European Commission. 3. Influencing elements in the development of entrepreneurship

One theory points to the Black Death in the 14th century as the creation of the necessary conditions for the rise of an embryonic middle class, as a consequence of the disappearance of one third of European nobility. This would have cleared the way for the survivors to lay claim on some of the land of the former owners. Also, the shortage of workforce has made landlords compete to attract labor by offering improved working conditions.

A less morbid theory puts the beginnings of entrepreneurship at the dawn of the industrial age. The development in technology has diversified the main means of production - land. The increased demand for labor and the economic interdependencies have stimulated at an ever increasing pace the development of urbanization, which in turn stimulated education and research, which in turn created the premise for the progress of society as a whole.

American essayist Paul Graham describes the development of entrepreneurship the following way: in order to be able to keep the fruits of their labor from the invaders, the ancient farmers have discovered that it is much easier to defend themselves collectively, by retreating behind the walls of fortified towns. A population concentrated in a small area has facilitated the rapid division of labor, which lead to the specialization of various crafts of to the creation of evermore superior products. These craftsmen have in time managed to gather larger and larger fortunes, reaching the level of the great landlords and even surpassing them after the explosion of commerce in the Renaissance era. The upward social mobility of the urban merchants set an example and offered a viable alternative to the rest of the population still living as workers on the lands of the feudal lords. Advancing into the modern age, Graham observes that entrepreneurial initiative emerges only when the state guarantees property and promotes a politics of minimal


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intervention into the economy. The utopia of communism demonstrates this very well: no one is willing to work selflessly for the good of the many – which lead to the gradual disappearing of innovation in the planned economies and to a fatal lack of competitive advantage on the global market. Drawing a parallel with the universe of a school, Graham argues that society can only advance when the geeks are being let to keep their sandwiches and pocket money by the bullies. In other words, only when man can fully enjoy the fruits of his labor will he have the necessary motivation to keep on creating.

4. Entrepreneurship in the European Union and Romania

In Lisbon in 2000, the European Council has set out an agenda for the development of SMEs in the Union and the encouragement of entrepreneurial spirit. The agenda holds ten important chapters:

1. education and training for entrepreneurship; 2. lowering the cost of setting up a company; 3. improved legislation; 4. availability of skilled labor; 5. widespread easy access to online services; 6. maximizing the advantages offered by the single market; 7. financial support; 8. improving the technological capacity of SMEs; 9. support for SMEs and the offering of successful models of e-business; 10. increased initiative at the level of EU representatives and at the national level. Still, even if now it is seen as a necessary step, creating an entrepreneurial mentality

in Europe poses a number of difficulties. First of all, the old world has a tradition of social protection. Especially in the

northern countries, there is a culture of social equality and of equal chances of climbing the social ladder. Statistical studies have shown that the children of a Swedish family have greater chances of being better-of then their parents (even if not by much) than the children of an equivalent family in the United States(5).

Looking at the scale of the E.U., less than 10% of employees make the step towards setting up their own company, even if almost half of the respondents in an EC study have declared themselves in favor of becoming their own boss(6). Furthermore, the same study has revealed that less than 4% of Europeans become entrepreneurs and or wish to do so in the immediate future – compared with a number three times as large for the United States. This is compounded by the fact that even though one third of European SMEs put growth as one of their top priorities, only a fraction of them manage it.

Here are the rest of the reasons why Europe still fails to use its entrepreneurial potential at its full:

1. Mobility on the labor market: because of the multitude of languages, cultures and regulations within the “single market” of the European Union, labor mobility is hindered when workers are not able to adapt to local conditions (one extreme example is Belgium, where it helps to know both official languages of this small country if you wish to stand a chance of getting a job). Adapting to the local color also poses difficulty for the companies that wish to expand within the Union, in the form of added costs.

2. Competition on the market for higher education: Europe, in spite of its size, fails to attract the most ambitious students to its universities. Research centers concentrate around some of the leading universities, which can spawn a number of innovations with great economic potential. America does this with great success.

3. Legislation which does too much to protect the employee to the detriment of the employer (France and Belgium are relevant examples). Reducing the certitude of staying in a job more or less well paid will offer many the needed impulse to seek something better.


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4. The protective paternalist attitude promoted by the educational system inculcates in the minds of young graduates the reflex of forever seeking an organization to take care of them. Few are those who wish to set up their own business after graduation, instead looking forward to “working for a multi-national”.

5. Barriers to entry: it takes longer in Europe to set up a business and there are many more conditions to be met (such as the minimum subscribed capital). To this, the excessive red-tape is added once you are out on the market.

6. The insignificant presence of venture capital: as mentioned before, there is a major tendency among the small European businesses of not planning for growth and to at most consolidate. Only a small number seeks to develop. This environment is not at all favorable for attracting and proliferating high-risk capital, which seeks the accelerated development of new products and business models. Even if the risks are large, the gains are more than a match for them. In essence, venture capital works with those people that wish to get rich fast. It can be argued that the entrepreneur that attracts risk capital looks to gain in a few years what he would in 40 years of working as an employee, opting for concentrating the stress and working hours in a much shorter time-span.

Romania, as a member of the European Union since January 1st 2007, fits neatly into the European trends through the process of integration and convergence toward the single market. However, as an economy which tries to catch up with its richer western neighbors and lets admit it – escape poverty – the necessity for creating new business is more stringent. A situation often seen in developing countries is where people become entrepreneurs out of need(7). The lack of a clear legislation though leads to a lot of companies acting in the grey zone of the economy and giving birth to the culture of grey entrepreneurship. There are many examples in our country of apparently prosperous companies that do not show any profit, of contracts won by various companies with political connections or of corruption at the level of local administration or in the juridical system.

Even if the grey entrepreneur is probably an unavoidable product of a still maturing market, on medium to long term this phenomenon leads to the stifling of competition and to the reduction of the competitiveness of Romanian firms in an international environment.

Romania has nurtured successful entrepreneurial ventures at an international level, especially in the IT field. Here the Romanian specialists were able to take an arguably equal starting position to the rest of the world. The basis for the production capacity was almost exclusively represented by the human capital and the knowledge it had. Also, by and large and especially during the 1999-2000 period of rapid expansion in the sector, the emphasis was on “open-source” software which has facilitated free and easy access to the needed tools for those interested.

Overall the main obstacle in the path of international competitiveness is the lack of know-how. This is the thing most complained about by the foreign potential investor when coming into contact with Romanian managers. There is no experience of the business environment (many don’t know how to structure a contract) and often western bankers mention “hand-holding” when they do deals in Eastern-Europe, referring to the increased (or total) logistical support they have to offer to their partners. If at the level of large company deals this is not such a terrible time and cost issue, at the level of SMEs it can mean the difference between signing a deal or not.

The solution for overcoming this lack of experience could be given by the investors willing to take a risk, the venture capitalists. Private equity funds active in Romania have about €300m under management, which is very little(8). Added to the general situation in Europe, the fact which further encumbers the thriving of this type of financial service is the under-development of the capital markets: exits in Romanian companies usually have to be done in private deals, an IPO being one of the least favored options.

In order to be able to make that initial investment, a company must set out an ambition plan for development – and this sort of companies are extremely rare.

Romanians need firstly the courage to initiate to be able to innovate later.


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Notes

(1) In “The Theory of Economic Development” Schumpeter claims that the banker is the one to incur all the risks of an entrepreneurial venture

(2) In the presentantion “A vision for SME participation in European technology platforms: the SME pact for large RTD projects” by Kevin Korti with the endorsement of The European Federation of High-Tech SMEs, at the Vienna ETP Conference (2006)

(3) More in the work of Leo-Paul Dana, Asian Models of Entrepreneurship. From the Indian Union and the Kingdom of Nepal to the Japanese Archipelago; World Scientific, 2007

(4) More in a study by David B. Audretsch, “Knowledge, Globalization, and Regions: An Economist's Perspective”, 2002

(5) More in the Focus Report “Meritocracy in America” by The Economist magazine, 29th of December 2004 and in the article “The rights and wrongs of the American model” of the same magazine, June 15th 2006

(6) More in the Eurobarometer study, published by the European Commission in 2003 (7) The study looks mostly at the Asian emerging economies, where due to poverty and lack of

employment opportunities people have to go into business on their own in order to insure their existence “The necessity of innovation”, Global Entrepreneurship Monitor, 2006

(8) Estimated based on the study “Foreign Direct Investment in Romania” published by Larive Romania

Bibliography

Benko, Cathleen, Weisberg, Anne (2007). Mass career customization, Harvard Business School Press

Connor, J., Sears, L. (2005). Why work is weird; Marshall Cavendish Dana, Leo-Paul Asian Models of Entrepreneurship. From the Indian Union and the

Kingdom of Nepal to the Japanese Archipelago; World Scientific, 2007 Friedman, Th. (2006). The World Is Flat: A Brief History of the Twenty-First Century;

HarperCollins Friedman, Th., The lexus and the olive tree; HarperCollins, 1999 Furham, A. (2005). The people business, Palgrave Macmillan Handy, Ch. (2007). Elefantul şi puricele, Codecs Handy, Ch. (2007). Epoca raţiunii, Codecs Handy, Ch. (2007). Pelerina goală, Codecs Johnson, D., Turner, C. (2006). European Business, 2nd edition, Routledge Lefter, V. (1999). Managementul Resurselor Umane, Editura Economică Lefter, V., „Resursele umane şi managementul competitiv al organizaţiei”, Economie

teoretică şi aplicată nr. 1/2006 Lefter, V., Manolescu, A. (2007). Managementul Resurselor Umane, Editura Economică Maier, Corinne (2005). Bonjour Laziness, Orion Nicolescu, O. (2001). Managementul întreprinderilor mici şi mijlocii, Editura Economică Robinson, Alan, Schroeder, Dean (2006). Ideile nu costa, Curtea Veche Stiglitz, J. (2002). Globalization and its discontents, Penguin Books The Economist, The search for talent, 7-13 October 2006 Văduva, S. (2004). Antreprenoriatul, Editura Economică


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REGIONAL ANALYSIS OF INCOME INEQUALITY. THE CASE OF ROMANIA

Delia ŢÂŢU Candidate Ph. D. Assistant

Răzvan BĂRBULESCU Candidate Ph. D. Assistant

Academy of Economic Studies, Bucharest Abstract. Inequality can be seen as an economic, social and political problem and can be

analyzed through income distribution, social stability or based on the effects on economic growth. The goal of this study is to determine the inequalities in income for Romanian regions, for the period 2000-2004, trying to identify the existence of a real convergence process.

Key words: income inequality; real convergence; regional analysis.

REL Clasification: 17E, 10B

I. Economic growth and regional inequalities The reason why Economic growth is so important in the economic literature is that it leads

to some major objectives like diminishing poverty for developing countries or uplifting the level of living for the developed countries. In order to obtain positive effects of economic growth, this has to be followed by uplift in productivity, investments in human capital, investments in technology and correlations of macroeconomics policies. Economic growth also assumes costs generated by the need of rapid adjustments an especially social costs paid by those who can not adapt in real time to the new requirements of the economy. The economic growth shouldn’t be seen as a simple raise in some macroeconomic indicators without their long term externalities. thus, the effects that economic growth generates, correlated with the mechanisms that generates those growths should be taken into consideration.

Inequality should be seen both as an economic problem and as a social and political problem. Its aspects coming from the economic nature of inequality seem to be more important and better determined. Inequality can be observed by analyzing the distribution of incomes and its effects over economic growth, social stability etc.

A synthesis of the studies analyzing the link between economic growth and income inequalities show the existence of three channels that transmit the effects of the interactions between the two variables:

• The classic approach (Kaldor, 1957: pp. 591-624 and Bourguignon, 1981:pp 1469-75) show that the marginal propensity to save in the rich countries is higher than in the poor countries, leading to the conclusion that a higher degree of initial inequality will generate higher total savings, capital accumulation and economic growth;

• The modern approach (Persson and Tabellini, 1991; Alesina and Rodrik, 1994: pp 465–90) considers that inequality has a negative impact over economic growth, through the following channels: Disparities are encouraging the “rent seeking” activities that reduce the right of property; Unequal societies are a lot more vulnerable to the problems of collective actions and specially in the cases political instability, need of redistributive policies, or high volatility of the economic policies while all these are lowering the growth rate; the median voter in a country with a high degree of inequality is relatively poorer and suffers form a


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more intensive taxation; If income disparities coexist with credit market imperfections, the poorer individuals are incapable of long term investments in human and physic capital, with adverse consequences on the long term economic growth.

• The unified model ensures an intertemporal reconciliation of the two previous approaches. It considers the classical approach true for low levels of incomes but not in the higher stages of economic development. In the initial stages of growth, the disparities will encourage growth because technical capital is rare and its accumulation requires savings. Thus, the inequality of incomes will generate high savings and economic growth. In the following stages of development, the human capital becomes the main engine of growth and disparities will have a negative impact over its accumulation (Galor, 2000: pp. 706–12).

The existence of disparities can be tested by a real convergence process both between the EU countries and at a regional level. In other words, can a country from Central and Eastern Europe be involved in a real convergence process towards the average revenues in EU while there is a divergence process between different regions of the same country?

The hypothesis of real convergence was initially formulated as a negative relation between productivity growth rate and its initial level. But as long as disparities between different regions have been explained through productivity differences, the hypothesis of real convergence can be put as a negative relation between real GDP growth and its initial level. This is unconditional convergence sustaining that poor countries that have access to new technologies can reach the rich countries due to higher growth rates.

The convergence or divergence problem was analyzed in the neoclassic growth model (Solow, 1956: pp. 65-94) saying that the product per worker in different countries or regions converges when the countries or regions have the same technology level, same preferences system and the same legal and institutional systems. Thus, the differences between national or regional incomes diminish in time. The endogenous economic growth models (Romer, 1990:pp 71-102) are saying that the level of income is influenced mainly by country (region) specific factors and that in these conditions, the countries (regions) will converge towards their own income level at steady state.

Empirical testing of these hypothesis leads to quantitative defining of two types of real convergence:

- β convergence – showing that on the long run, in the context of absolute convergence hypothesis, the poor economies have the tendencies to grow faster than the richer ones and in the context of the conditional convergence hypothesis, the same phenomenon depends on different exogenous factors;

- σ convergence – showing that a downwards variation of the level of incomes / inhabitant in a group of countries.

II. Empirical tests for regional inequalities Based on the Eurostat Data, we have realized a regional analysis for Romania, in the

2000-2004 timeframe (a timeframe when Romania had economic growth), to show the regional disparities and identify the process of diminishing these disparities.

Out of the eight development regions, the one with the greatest GDP is Ilfov-Bucharest region. This region will be used further on as a base for further percentage calculations and a target in the convergence process for the other regions.

Percent of GDP/capita in a region versus Bucharest-Ilfov region Table 1

Region/year 2000 2001 2002 2003 2004 N-V 0,45 0,46 0,46 0,50 0,51

Center 0,52 0,52 0,52 0,54 0,54 N-E 0,34 0,35 0,35 0,37 0,36 S-E 0,43 0,42 0,42 0,44 0,47

S-Muntenia 0,40 0,39 0,39 0,41 0,44 S-V Oltenia 0,41 0,42 0,39 0,43 0,44

V 0,50 0,53 0,52 0,57 0,59 Source: Own calculations based on Eurostat data.


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y = 2,5999x - 13,923

R2 = 0,1640

2

4

6

8

7 7,1 7,2 7,3 7,4 7,5 7,6

Initial level of GDP/Inhabitant (logarithmed vale)

Ave

rage

rith

m o

f gro

wth

for

GD

P/in

habi

tant

(200

0-20

04)

In table 1 we can see the differences in incomes between Bucharest and the other regions and that these disparities are kept for the entire analyzed period. Also, differences exist between the other regions too but the disparities level is smaller. The smallest percentage is in the North – East region while the highest is in the Center and West regions. In order to show the convergence process based on the percentages above, we have analyzed their changes in the 2000-2004 timeframe.

The convergence process based on percentage changes Table 2

Region/year 2001-2000 2002-2001 2003-2002 2004-2003 2004-2000 N-V 0,008 0,006 0,034 0,012 0,060

Center 0,001 0,005 0,021 -0,004 0,024 N-E 0,015 0,000 0,014 -0,012 0,018 S-E -0,008 -0,003 0,018 0,036 0,042

S-Muntenia -0,007 -0,004 0,024 0,028 0,040 S-V Oltenia 0,011 -0,032 0,044 0,008 0,031

V 0,027 -0,003 0,047 0,022 0,093 Source: Own calculations based on Eurostat data. The results are showing a low degree of convergence while in some regions the difference

versus other regions is growing (North-East region during 2004-2003, South-East region during 2002-2000, region South-West –Oltenia in most years, Center region during 2004-2003). In order to see the final effects too, a 2000-2004 comparison was made. The most significant catching up of the disparities versus the Bucharest-Ilfov region is in the West region, followed by the North-West one. The smallest catching up is in the case of the North-East region.

β Convergence tests were performed from two perspectives: The first reflects the negative relation between initial GDP and the rhythm of growth while the second reflects the negative relation between the GDP differences recovered by the seven regions versus Bucharest-Ilfov.

According to the economic growth models, in order to determine the speed that a country has towards steady state, we need to start from the following equation:

)ln(ln *ty yyg −β≈ , where gy is the growth rhythm, and β shows what part of the

distance to steady state is covered during the analyzed period. In order to calculate β , the following equation needs to be estimated:

0100

lnln1 yyy

TT α+α= , and )1ln(1

1TTα+−=β , where the endogenous variable is the

average rhythm of growth of GDP/Inhabitant in the T-0 period and the exogenous variable is the level of GDP/Inhabitant in the 0 period. If the 1α parameter is negative, the convergence process exists.

Figure 1. Testing the β unconditional convergence hypothesis (The rhythm of growth variant) As we can see we can not speak of a β convergence process due to the fact that the

relationship between the rhythm of growth and the initial level of GDP / Inhabitant at a regional level is a positive one.

Same conclusions can be drawn in the case of testing the β convergence based on the gap overlap time. For this, we have started from the equation:


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y = 0,0059x - 11,603

R2 = 0,9528

0,14

0,145

0,15

0,155

0,16

0,165

0,17

1999 2000 2001 2002 2003 2004 2005

Ani

abat

erea

sta

ndar

d a

PIB

-ulu

i pe

locu

itor (

valo

are

loga

ritm

ată)

0100 ln)ln(ln yyyT α+α=− where Ty represents the percent of GDP/Inhabitant versus the best region in the final moment and 0y represents the initial percent of GDP/Inhabitant versus the best region. The results obtained after the equation estimation are presented in figure 2.

y = 0,2053x - 0,0449R2 = 0,2456

00,010,020,030,040,050,060,070,080,090,1

0,3 0,35 0,4 0,45 0,5 0,55

nivelul initial al PIB-ului pe locuitor (pondere din regiunea Bucureşti-

deca

laju

l rec

uper

at d

e re

giun

i în

perio

ada

2000

-200

4

Figure 2. Testing the β unconditional convergence hypothesis (the overlapped gap variant)

In the final part of the study we test the σ convergence hypothesis in order to determine if the regions have succeeded in reducing the gap between each other. For this we analyze the variance of incomes by trend estimation of the standard deviation of GDP/Inhabitant. Although the less developed regions should grow faster, the variance of income between them should reduce systematically.

Figure 3. Testing the hypothesis of σ convergence

This kind of convergence is also not realized in the case of Romanian regions in the 2000-2004 period. We can see an up growing trend while the differences between the incomes in regions tend to grow.

Bibliography

Alesina, A., and D. Rodrik, “Distributive Politics and Economic Growth,” Quarterly

Journal of Economics, Vol. 109, 1994, pp. 465-90 Bourguignon, F., “Pareto Superiority of Unegalitarian Equilibrium in Stiglitz’s Model of Wealth

Distribution with Convex Saving Function,” Econometrica, Vol. 49, 1981, pp.1469-75 Galor, O., “Income Distribution and the Process of Development,” European Economic Review,

Vol. 44, 2000, pp. 706-12 Kaldor, N., 1957, “A Model of Economic Growth,” Economic Journal, Vol. 67, pp. 591–624. Persson, T., Tabellini, G., “Is Inequality Harmful for Growth? Theory and Evidence”,

National Bureau of Economic Research Working Paper, nr. 3599, 1991 Romer, Paul M., “Endogenous Technological Change,” Journal of Political Economy,

October 1990, 98 (5), pp. 71-102 Solow, R., ”A Contribution to the Theory of Economic Growth”, Quarterly Journal of

Economics 70, 1956, pp. 65-94 *** www.ec.europa.ec/eurostat


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THE ROLE AND ECONOMIC IMPACT OF REMITTANCES

Carmen NĂSTASE Ph. D. Senior Lecturer Carmen BOGHEAN

Candidate Ph. D. Lecturer Florin BOGHEAN

Candidate Ph. D. Lecturer University of Suceava

Abstract. Large-scale outward migration is one of the symptoms of slow progress in development and low expectations of employment and higher living standards at home. Nevertheless, for many developing countries, remittances of migrants working abroad have become an important source of foreign exchange. They are private income and a means to improve the living conditions of many poor households in the receiving countries. While the ultimate policy objective must be to remedy the root causes of the migration through output and productivity growth and job creation in the home countries, remittances are to some extent a potential contribution to the external financing needs of the migrants’ home countries. A challenge for policymakers is to use this potential within the framework of a broader development strategy and channel the remittances, as far as possible, to productive uses. Developed countries can support efforts to maximize the developmental impact of migrants’ remittances by reducing the cost of remittance transfers and making the transfer channels more efficient. Home and host countries could also cooperate to create incentives for talented migrants to return home after several years of work abroad so as to strengthen the local human resource base, by using the experience and skills acquired abroad. Indeed, managing international labour mobility, especially between the developed and the more advanced developing countries, on the one hand, and the poorer countries or economies with large amounts of excess labour, on the other, could constitute a key element of the global partnership for development.

Key words: religion – economy relationship; knowledge-based economy; religious

organizations; social partners. REL Classification: 10G

Because of incomplete reporting, which is mainly due to the fact that a large

proportion of migrants’ remittances goes through informal channels, their actual value is believed to be much higher than what is recorded in balance of-payments statistics. Minimum thresholds for official recording also mean that many countries do not register all their remittance inflows. Indeed, it is estimated that unrecorded remittances amount to at least 50 per cent of the recorded flows. (World Bank 2006: pp.88-89)

Recorded migrants’ remittances to developing countries have considerably increased since the early 1990s. They quadrupled between 1990 and 2004, becoming an increasingly


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important source of foreign exchange for these countries (fig. 1). In 1990, the level of remittances was about half that of ODA inflows, and close to that of FDI inflows. Subsequently, they grew more slowly – albeit more steadily – than FDI but faster than ODA, and since 1996 they have been exceeding ODA by an increasing margin.

Overall, remittance inflows into developing countries have been more stable than their export earnings, FDI inflows, other private capital inflows and ODA. Unlike private capital flows, they do not fluctuate with the mood of capital markets or decline when the performance of the domestic economy of the receiving countries worsens. In fact remittances continued to increase at the beginning of the millennium when FDI showed considerable volatility as a result of the weak outlook of the global economy (fig. 1). Indeed, remittances often behave in a countercyclical pattern, as remitters tend to increase their transfers in times of economic crisis or natural disasters in their countries of origin. However, to some extent migrants’ remittances are also undertaken for portfolio diversification reasons, in which case they tend to behave procyclically.

China and the Philippines provide two examples of how remittances can respond to dramatic changes in economic activity and the investment climate in recipient countries in the same manner as capital flows. Remittance inflows into China in the past few years have in part been motivated by speculation about the exchange rate of the renminbi and have behaved procyclically due to fast economic growth in that country. Similarly, remittance flows to the Philippines rose steadily as the investment climate improved in the early 1990s, but they became more volatile following the financial crisis in the late 1990s. Cross-country comparisons also reveal that remittances are affected by the investment climate in recipient countries (OECD, 2003: pp.33-35), but, overall, remittance flows have been found to be less volatile and procyclically than foreign exchange inflows from other sources (IMF, 2005: pp.12).

Another particularity of migrants’ remittances is that they typically constitute a form of additional household revenue in the recipient countries and the government has little control over their use. This makes it difficult to integrate their use into a strategy for the financing of development. On the other hand, they are less costly for the recipient country than foreign exchange inflows from other sources, because they do not create liabilities vis-à-vis the country of origin, such as interest payments in the case of debt instruments, conditionality in the case of official grants, or profit remittances in the case of FDI.

Source: UNCTAD, 2006.

Figure 1. Migrants` remittances and financial flows to developing countries 1990-2004

(billions of dollars)

Foreign direct investements

Migrants` remittances

Official development assistance

Private capital flows


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In contrast to migrants’ remittances, FDI flows are the outcome of a global assessment of profit opportunities. If well managed, FDI, especially in the manufacturing sector, can help the recipient developing economies to seize opportunities presented by globalization. From the point of view of developing countries with a small domestic market or excess labour, FDI offers one possibility to participate in international production networks. Accordingly, in recognition of this potential, many countries have liberalized the entry of TNC affiliates and stepped up efforts to attract FDI by offering fiscal, financial and material incentives. But more FDI does not automatically result in higher domestic income, enhanced productive capacity or faster growth. Its impact depends in large part on the extent to which the investment actually adds to existing productive capacity and increases productivity, and on the sectors in which the investment is made.

The rapid expansion of recorded remittance flows since 1990 has been due to three factors. First, migration from developing countries has been increasing owing to a confluence of conditions, such as labour shortages in some activities in a number of advanced and dynamic economies (United Nations, 2006: pp.65-66), wage differentials and demographic disparities between source and destination countries, as well as lower costs of migration, including transportation. Second, the share of skilled workers and immigrants with higher educational attainment has risen significantly in the past three decades. Their resultant higher earning power has also contributed to larger remittances (Burgess and Haksar, 2005: pp.33-34). The third factor is a purely statistical one: both receiving and sending countries have significantly improved their tracking and recording of remittances in recent years, and there has also been a shift from informal to formal channels of transferring in response to lower transaction costs and technological advances. The share of unrecorded remittances is also likely to have shrunk as a result of stricter controls since September 2001. In addition, a number of developing countries have changed their foreign exchange control policies, which has reduced the black market premium for foreign exchange. Therefore, while the actual value of remittances may still be considerably underestimated, the actual year-on-year increase over the past few years is likely to be smaller than what the official records suggest.

Although migrants’ remittances vary considerably across countries, they are spread more evenly among developing countries than FDI flows. Nevertheless, the inflow of remittances has grown much faster in Latin American and Caribbean countries and in Asian developing countries than in Africa. Between 1990 and 2004 these flows multiplied by a factor of 12, 4 in East Asia and the Pacific, by 7 in Latin America and the Caribbean and by 5,6 in South Asia, but only by 4 in sub Saharan Africa, where recorded remittances are far less significant (World Bank, 2006: pp.121-123).

Geographical or cultural proximity to countries with much higher per capita income is one of several factors influencing migration from, and hence remittances to, developing countries. It explains, for example the high level of remittance inflows, in absolute terms, for Mexico, and, in relation to GDP, for Lesotho, Jordan or Yemen. In absolute terms, the largest remittance-receiving countries are the two developing countries with the largest population, China and India. However, in terms of their share of GDP, remittances are of particular importance for smaller countries (fig. 2). In 2004, they accounted for more that 15 per cent of GDP in 5 developing countries and for 10 per cent or more in 10 countries. In exceptional cases remittances represent over one fifth of GDP. For some small countries, remittances have exceeded FDI inflows by a wide margin. But the same is also true for India, where they reached $20.5 billion in 2005 – almost twice the total inflow of portfolio investment and FDI combined, which was $11.9 billion (EIU, 2005: pp.78-80).


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Source: UNCTAD, 2006.

Figure 2. Major remittance receiving developing countries, 1995, 2000 and 2004 (Per cent of GDP)

Remittances have many facets and can have various effects at the microeconomic and macroeconomic level. There is broad agreement that they have a direct positive impact on poverty alleviation, since they frequently flow directly to poor recipients and allow them to meet basic needs, such as food and clothing, and to purchase other consumer goods. The effects of migrants’ remittances on economic growth and development are less clear. They depend on a variety of factors, including the pattern of utilization of remittances by recipient households, the size of remittance streams over time and the motivation for remittances, as well as the efficiency of domestic financial intermediation and national monetary conditions. The contribution to growth and development of the receiving economy would be greater the larger the proportion of remittance inflows that can be channeled into investment in physical and human capital, either directly by the receiving individuals or indirectly through financial intermediation in the recipient country.

Evidence on the actual utilization of remittances at the micro level is anecdotal, but it is estimated that 80 to 85 per cent of remittances are used to cover basic everyday needs of the recipient households (de Vasconcelos, 2005). Remittances are an important social insurance against shocks for low-income households, and they help to smooth consumption. Where many of these households face difficulties in borrowing for the acquisition of land or residential construction, remittances can play an important role in easing private credit constraints and, to some extent, substitute for shortcomings in the domestic financial system (Giuliano and Ruiz-Arranz, 2005: pp.27-29).

Although remittances generally add to household income and consumption, sometimes they are also used for investment in capacity or productivity enhancing investment in agriculture or to start or expand small-scale entrepreneurial activities in manufacturing or services. Some studies indicate that remittances have facilitated the capitalization of migrant-owned businesses (Buch, Kuckulenz and Le Manche, 2002: pp.115). Their contribution to capital formation is likely to increase with the level of per capita income of the recipient country: once basic consumption needs are satisfied, a


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growing share of remittances is used for investment in physical and human capital. There are also examples of joint efforts by groups of migrants to provide grants for investment in local infrastructure projects, such as schools, in their countries of origin.

It is well known that while emigration can alleviate the unemployment burden and generate remittance income, it costs the country in terms of a loss of skilled workers and talent, rendering it more difficult to develop local manufacturing activities. On the other hand, over and above remittances, emigrants can also benefit their home countries when they return with additional professional skills and, sometimes, entrepreneurial spirit.

Parallel to the microeconomic impact on income and welfare of the receiving households, remittances can have significant macroeconomic effects in the recipient economies. As remittances are a major source of foreign exchange, they can help alleviate the balance-of-payments constraints of developing countries, so that a trade deficit does not result in higher indebtedness. By providing additional foreign exchange for the acquisition of imported inputs for domestic production they constitute a source of financing for development. However, this effect depends on how the receiving households use their remittance income. To the extent that the latter is spent directly on imported consumer goods, the positive balance-of- payments effect will be offset.

It has been argued that the potential positive effects of migrants’ remittances can be reduced by their impact on the exchange rate (Amuedo- Dorantes and Pozo, 2004: pp.35). However, to have such an effect, the share of remittances in the recipient country’s foreign exchange transactions would have to be particularly large; moreover, the size of remittances would have to increase dramatically within a short period of time, and not be matched by a similar increase in imports. These conditions are likely to occur only in exceptional cases. In general, as noted earlier, migrants’ remittances are the most stable form of financial flows to developing countries, often changing against the cycle and frequently accompanied by changes in imports. There is even some evidence that in countries that receive both large private capital flows and large remittances, the latter can help reduce the probability of current-account reversals and financial crises (Bugamelli and Paterno, 2005: pp.78-80).

An indirect effect of a stable and large inflow of migrants’ remittances for the recipient countries appears to be better access to international capital markets. Expectations of higher future remittance inflows tend to lead to improved creditworthiness and higher bond ratings of the country. On the one hand, this opens or strengthens the possibility to “leverage” the impact of remittance inflows on development by additional external borrowing for the financing of imports that are essential for diversification, creation of additional productive capacity and technological progress. On the other hand, this effect may also lead to external borrowing for non-productive purposes, thereby contributing to the build-up of debt that will have to be serviced from future national income.

Current world demographic trends and the widening gap in standards of living between most developing and developed countries point to an intensification of labour migration from developing to developed countries for a number of years to come. From a longer-term perspective on development, remittances should be considered a temporary source of additional foreign exchange which can help solve the problems that have been causing emigration in the first place. That is, they can push domestic growth and development and generate increasingly productive domestic employment.

Developing countries, especially those for which migrants’ remittances constitute a major source of foreign exchange income, should therefore aim at integrating migration and migrants’ remittances into a broader development strategy. Such a strategy could include the provision of incentives for migrants, or for the recipients of their remittances, to channel these transfers to the largest extent possible into productive uses. From this perspective, such remittances could have a similar effect as “diaspora” investment, which can play an important role in the development process. This is because the diasporas are often better informed about local conditions than other potential foreign investors.

The potential of migrants’ remittances has been increasingly recognized in the international debate on development policies. In order to increase remittances per migrant,


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the importance of reducing the cost of remittance transfers and making transfer channels more efficient, for example through a common electronic platform to facilitate remittance transfers, has been stressed. Further- more, the impact of remittances could be enhanced by efforts to strengthen the domestic financial system in developing countries.

Another approach to addressing development concerns in relation to emigration would be the financial capital provision of incentives in home countries to encourage the return of talented migrants after several years of work abroad. They may bring home valuable skills acquired in destination countries, thus turning the “brain drain” into “brain gain”. With internationally managed cross-border labour mobility as an element of the global partnership for development, several objectives could be pursued in parallel: an increase in remittance flows to developing countries, meeting labour demand in some segments of the international labour market, and ensuring “productive repatriation” of migrants are some possibilities.

There have been proposals to “multilateralism” immigration rules as a global public good. (Rodrik, 2001: pp.33-34). Coordination between source and destination countries, on the basis of bilateral agreements and temporary foreign labour schemes could be part of managed migration policies. For instance, it has suggested the creation of a temporary labour mobility scheme as an instrument to spark development and growth in the home country. Under such a scheme, migrants would leave their home countries for a period of 2 to 5 years, while both the home and host country would provide incentives for their return and for a new round of migrants to replace them. It is expected that those who return would bring back some financial capital, as well as various skills and professional competencies that could be employed in support of economic and social development in their home country. Obviously, such a scheme can only function if it is supported by a number of other institutional features at the international level, as well as at the national level in both the home and host country. One step in the direction of greater international labour mobility is the so- called Mode 4 proposal for supplying services that is under consideration in the current round of GATS negotiations at the WTO. This recognizes that a regulated temporary movement of skilled persons could create welfare benefits for both the home and host countries by turning the brain drain into managed brain circulation to benefit development.

Bibliography

Amuedo-Dorantes, C.; Pozo, S.; „ Workers’ remittances and the real exchange rate: a

paradox of gifts”. World Development, Washington DC, 2004 Burgess, R.; Haksar, V.; „Migration and foreign remittances in the Philippines”. IMF

Working Paper, Washington, 2005 Buch, C.; Kuckulenz, A., Le Manche, M.; „Worker Remittances and Capital Flows”, Institute for

World Economics, Working Paper no.1130, Germany, 2002 Bugamelli, M.; Paterno, F.; „Do workers’ remittances reduce the probability of current

account reversals?” World Bank Policy Research Working Paper no. 3766. Washington, DC. November, 2005

Giuliano, P.; Ruiz-Arranz, M.; „Remittances, financial development and growth” IMF Working Paper, Washington, DC, December, 2005

Rodrik D, „Comments at the Conference on Immigration Policy and the Welfare State”, New York, 2001

EIU Country Report: „India. Economist Intelligence Unit”, September 2005. IMF and World Bank, „Assessment of Costs, Implementation Issues, and Financing

Options”, Wasington DC, September, 2005 OECD, „Trends in International Migration 2003”, Organisation for Economic Cooperation

and Development, Paris, 2003 UNCTAD „ Trade and Development Aspects of Professional Services and Regulatory

Frameworks” Geneva, 2004 UNCTAD, “Trade and Development Report”, Unite Nations; New York and Geneva, 2006 World Bank, „Global Economic Prospects: The Economic Implications of Remittances

and Migration”, Washington DC, 2006


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DEMOGRAPHIC PROGNOSIS OF METROPOLITAN AREAS.

A STUDY OF ROMANIA’S INTEGRATION QUALITY INTO THE EUROPEAN UNION

Grigore Ioan PIROŞCǍ

Ph. D. Assistant Daniela VIRJAN

Ph. D. Lecturer George Laurenţiu ŞERBAN-OPRESCU

Ph. D. Assistant Academy of Economic Studies, Bucharest

Abstract. The benefits, opportunities and challenges deriving from Romanina’s becoming

a member of the European Union, strongly represent the most intense debated topic in the scientific community of Romanian economists. Their attention is oriented towards the analysis of the impact that Romania’s accession produced at social and economic level and towards the ways in which this impact reflects on the Romanian business environment and, ultimately, on the individual welfare. In order for such an analysis to be valuable it must be grounded on models and instruments able to offer a most accurate view of the essence of economic phenomena and their evolution along a certain reference period. For these reasons, the present study has in view to elaborate a rigorous and complex model able to offer a solid basis for economic analysis directed towards assessing the impact of Romania’s accession to the European Union. This framework has the role and ability to reflect the dynamic and intricate system of population structure and, henceforth, a provisional model for demographic evolution in the context of integration is more than necessary.

In this paper, the attention of the authors will focus on urban metropolitan areas in order to create a prognosis model of the demographic evolution of these areas taking stock of Romania’s new condition as member state of the EU. The endeavor will demonstrate that already existing demographic patterns are not able to describe present conditions and will propose a new model of prognosis for demographic evolution in urban areas, a model adapted to present economic and social circumstances.

Keywords: population; prognosis; demographic model; metropolitan area; European Union.


I. INTRODUCTION: Theoretical aspects of demographic models Population can be defined as a dynamic and complex system. The inputs and outputs

from this system are conditioned by various factors. In the particular case of population from metropolitan areas, the most important factors of its evolution are the economic ones.


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Metropolitan areas are usually characterized by a high level of economic development or, at least, higher than average. In these areas are usually concentrated the industrial parks, the most part of the foreign investments, the human capital training all of these contributing to the production and economic development facilitated also by the transportation and communication infrastructure. Given the economic and social importance of the metropolitan areas an important part of the population is trying to take advantage of the opportunities provided by the closeness of a metropolitan area. From this point of view, it is obvious that the study of the economic development and growth should take into account the demographic evolution of the metropolitan areas. The present study aims to create an economic model for the analysis of the correlation between the metropolitan areas demographic evolution and the economic and social development.

II. METHODS: Demography and economic modeling The analysis of the metropolitan areas population demographic evolution is based on

a model which derives from the dynamic discreet equations. Usually, the demographic analysis uses the prognosis model made by Thomas Malthus. An important classical liberal, the british economist discovered a relation between the population growth and the economic resources used by population. More precisely, Malthus theory shows that, while the population grows with a geometrical rate, the economic resources regenerates with an algebraic rate. Further, the majority of the demographic models were inspired by Malthus theory including the theory of the stable population and the theory of the semi-stable population. Especially, the later model was avoided because it can only analyze the under-developed economies with a transition population characterized by a high fertility. All these characteristics are not specific to Romania. Further more, the metropolitan areas population from Romania can not be characterized by an exponential evolution in the late decade. From these reasons, we can conclude that none of the demographic models derived from Malthus theory can not be used in Romania particular case. There is, of course, the possibility to use a stochastic model which gives the possibility to analyze the systems in their evolution using mathematical equations. But "Stochastic" means being or having a random variable which leads to the main difficulty of this type of model: the actual or the future status can not be precisely correlated with the original status. From this reason, always a stochastic model is based by probabilistic calculation (Cenusa, 1999: pp. 150) and take into account at least two independent variables. The best known stochastic model for demographic prognosis is the Markov models. This kind of analysis can not be applied in the Romania demographic evolution for two reasons. First, given the short period from EU integration, there are to few indicators to correlate the population evolution and the economic development using a stochastic model. Second, a stochastic model uses only current variables to project future variables and ignores the previous variables. This kind of system is called “without memory”. The demographic model uses variables which depend on previous states such as the investments in labor market development.

III. RESULTS: Demographic evolution and EU integration First demographic models were based on population genetic studies. The fluctuations

and movement of population were relatively stable and these are the conditions for the most known model of this kind: Wright-Fisher (McVean, 2003: pp.1-2). In this demographic model the population dimension is given and constant. For a population which is constant, the scientists discovered that the genes can be inherited from by the offspring with a certain probability. Another significant research in this field was made by G.A Watterson referring to the homozygote. (Watterson, 1985: pp. 2) or Rogers-Harpending demographic model: This model yet, cannot bring any contribution to the understanding of the implications of an


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economic integration. A model has to be build according to it purpose. In a demographic model it is almost impossible to compute all the variables that influence its structure. For this reason, the present study aims to put into evidence the most significant components for the analysis of the social and economic advantages which Romania gained through European integration.

The simplest demographic models contain: population status in the base period, the time period for the event and population status in the current period correlated with the rate of growth (McVean, 2003: pp. 6). This kind of model focuses on the difference between constant population distribution and growing population.

From a direct relationship between the wage level and number of immigrants attracted by high wages in the developed economic metropolitan areas was laid the basis for the model which takes into account the other components weighted with factors of direct and indirect influence. (Sora, Hristache, Mihaiescu, 1999: pp.323).

Yt+1 = f(Yt) = µ Yt (1-t) Xt = λ Yt (1-t), λ > 0 Yt+1 = γ Xt, γ > 0,

Where Yt – wage level in metropolitan areas; it increases up to a certain point after which it

begins to decrease because the job supply is close or even exceeds the demand for work. Xt – number of immigrants attracted to the metropolitan areas IV. DISCUSSION: The structure of the demographic model for the metropolitan

areas In the grounding of the forecasting model of the population growth in the

metropolitan areas have been used the following components: the total population of the metropolitan area and the external and internal immigration which modifies the population in the basic period. Taking into account the economic component of the model, it becomes dependent on the following components which make up the total population and immigration population.

- Population growth according to: o GDP (direct) o Level of prices - Employed population: - Population migration according to o The GDP percentage allocated to the development of the labor market o Wage level o Cost of search for jobs o Level of taxation - The level of unemployment according to: o Unemployment subsidies o Investments - Population aged up to fifteen - Population aged over 64 Population growth It is the indicator which comprises the negative and positive alterations regarding

population number over a certain period of time. Its value is calculated as subtract between the number of new born and the number of deceased, i.e. subtract between birth rate and death rate. Next to these two indicators in the analysis of the population growth enter also fertility, nuptiality, divorciality, all of these having an impact of the number of birth.


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Although not representative for this provisional model of the population growth in the metropolitan areas, the intensity of these phenomena can be calculated.

Birth rate (number of new born per 1000 inhabitants)

1000PNn vii

g=

Where ng – general birth rate, Nvii – number of new born, P – average number of population In the vast majority of cases in which this indicator is used the intensity of birth rate is

calculated over a standard period of one year. With the purpose of comparing can be used shorter periods like a month, a trimester or a semester using the following formulas:

100012PNl

nl = 10004P

Ntrntr =

10002

P

Nsns =

Using birth rate, information referring to the characterization of birth rate intensity on urban-rural areas or in the territorial profile may be interpreted. Studies on birth rate may be conducted within sub-collectivities of population grouped under different economic, social and political traits. There can also be analyzed the seasonal nature of birth rate.

Birth rate is usually used under the form of a generalized rate. Only, in calculations must be framed a certain fertility contingent from population and this is the one represented by men aged between 18-54 and women aged 15-49. In practice, it can be noted a relatively small influence of the male fertile contingent, reason for which the formulae used in the analysis of fertility concentrate exclusively on the female fertile contingent. There is a connection between the number of new born and the dimension of the female fertile contingent. This connection is illustrated in the general rate of fertility.

10049

15∑=

=

x

g

Fx

NviiF

Where Fg = general rate of fertility, Fx = the number of population aged x. The phenomenon of nuptiality represents the number of marriages or persons who get

married in a certain period of time. The general rate of nuptiality is calculated using the formula below:

1000P

Cc =

Where c = general rate of nuptiality, C = the number of individuals getting married in a certain period of time, P = average population.

As with the case of analysis of the population fertility, there is in this case, a certain population sample which can be taken in consideration, named nuptial contingent. Although the age limit varies greatly country to country, there not existing practically a superior limit in this sense, in our country, the nuptial contingent comprises female population aged 16-39 and male population aged 18-44. Of course, in the analysis one is interested in the number of individuals who can actually merry not the number of individuals presumed to do so. The is also used in this analysis the limit of those aged 60 that is the population aged less than 60 respectively the population older than 60. Many times in the analysis of nuptiality one takes into account if the single individuals or remarried individuals are comprised in the general rate of nuptiality.

Population nuptiality is analyzed complementary to population divorciality. The dicorciality phenomenon represents the number of divorces or individuals who get divorced in a certain period of time. The general rate of divorciality is calculated using the formula below:


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1000P

Dd =

where: d = general rate of divorciality, D = number of individuals who get divorced in a certain period of time, P = average population.

Not all the population is taken into account when the divorciality phenomenon is analyzed. For this reason, the number of divorces is correlated with the number of marries, otherwise it cannot be representative. The correlation between these two indicators is calculated using the formula below:

1000Pc

Dd =

where: d = general rate of divorciality, C = number of individuals who get divorced in a certain period of time, Pc = average married population.

Because divorces affect nuptiality, many times, in real life, is used the indicator called net nuptiality rate. This is calculated as subtract between general rate of divorciality and general rate of nuptiality:

1000P

DCdcCneta

−=−=

where: c = general rate of nuptiality, d = general rate of divorciality, C = number of individuals who get married in a certain period of time, D = number of individuals who get divorced in a certain period of time, P = average population.

All these indicators are complementary to population natality. The population growth is analyzed through population mortality too. Mortality is defined as the total number of deceases in a certain period of time. A general view on mortality phenomenon is given by the indicator called general rate of mortality:

1000P

Mmg =

where: mg = general rate of mortality, M = number of deceases in a certain period of time, P = average population.

Like natality, mortality is calculated for a standard period of time, usually one year. We can study mortality phenomenon through a series of criteria such as: gender, age, decease causes or areas. When mortality is analyzed the following indicator are also used: child mortality and new born mortality. The first indicator refers to the number of children deceases and the second refers to the number of new born deceases.

The metropolitan area population growth prognosis use the population growth correlated with a series of indicators. The most representative indicator which influences the population growth is GDP:

IP

IPIBYpop

Sporul

tt

ttt

t1/

2/1

−

−−α=

where: Yt = number of inhabitants, PIB = gross domestic product, P = level of prices. Migration movement of population This demographic phenomena brings influence over the evolution of population at a

lower extent than birth rate and mortality do, but it is also very important, due to the economic character of the demographic model of prognosis for metropolitan area. By migration movement we take account of displacement of population from an area to another


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during a definite period of time. Metropolitan areas are so much aimed by people as these are normally the most economic developed areas, offering jobs, on the one hand, and greater revenues than national average, on another. In Romania, Bucharest and Constance are the biggest metropolitan areas, concentrating the most important parts of industry, but offering in the same time a great supply of services. These are two metropolitan area founded and developed around the biggest cities of our country.

But migration movement implies more than a simple movement in search of a better job. By migration movement is understood the displacement from one city to another, or even from one country to another, but only with the change of the residential status, more precisely of the permanent residence. That is why we assume that it is known the difference between migration movement and the indicators such as floating migration movement and oscilant migration movement of population. The analysis of the migration of population can be done using the following formulas:

EIMb +=

EISm −= where: I = number of migrants, E = number of emigrants, Mb = gross migration in absolute data, Sm = net migration in absolute data, or migration growth.

Because of the fact that cities differ one of another by number of inhabitants, and especially metropolitan area against the rest of the cities, the analysis of migration moving has to contain the average number of population as well. This way we can determine the gross migration rate and the net migration rate:

1000P

)EI(rb

+= 1000

P)EI(

rm−

=

In current use it can also be used the migration rate, respectively the emigration rate:

100PI

ri = 100PE

re =

The difference between them represents the net migration rate:

rmP)EI(

reri =−

=−

Finally, general growth of population is a sum of natural growth and migration growth: SmSSg n += sau: )EI()MN(Sg −+−=

Employed population Represents the total amount of persons which are legally employed. It is not important if we

are talking about a temporary job or about a career, but the legality of that work. Employed population depend on the economic development, as much as economic development hang on employed population. But this time GDP has not a direct influence like it used to have in the case of population growth. In the demographic model of population from metropolitan areas we have assumed that employed population, the population who has migrated towards a metropolitan area more precisely, depends on percent from GDP allocated to the development of employment market. Just as for the influence of GDP over the population growth was used an t-1 and t-2 time index, with t the current moment, we have also used the same period of time for the direct influence of GDP over the employment market. It has been used a wage index but calculated in the current period against the previous period. Great earnings are actually those which mobilize then men to accept to some extent the cost of searching. This last indicator has an opposite influence over the level where employed population and population able to migrate are willing to reach.


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Finally, the intensity of the metropolitan people to work, respectively to pay the cost of the search, are inversely proportional with the level of the fiscal debts of the employees. The bigger are the taxes, the smaller will be the level of employment and the population willing to migrate towards metropolitan areas. The formula over the employed population and the migration is the following:

( )I p

ISal

IC

I LpPIBdM tW t

MigrPop

OcupatăPop

tt

tt

tt

tt

tIm

..

..

.

1/

1/

1/

2/1

−

−

−

−−+β=

where: Wt = employed population, Mt = population migrated towards metropolitan areas, LpPIBd .. = the amount of GDP meant for the development of employment market, Sal =

wages, C = spending for finding a job, Imp = debts. Unemployment This social negative phenomena shows itself as impossibility for some people to have

a place to work for a wage. In this category are included also the people who have lost their jobs, or they just want to work and are older than 15. It is all about a desequilibrium on the employment market between demand and supply of jobs.

The registered unemployed persons are those who have declared that they are on the list of any agency for employment and professional training, wether or not they have been receiving any kind of help through social insurances.

As absolute formula, unemployment represents the number of persons from civilian population which are not employed. As index, it is used the rate of unemployment :

100Po

NsRs = or: 100

Pa

NsRs =

where: Rs = rate of unemployment, Ns = unemployed persons, Pa = active population, Po = employed population.

The matter of unemployment as a economic social phenomena is complex. To make easier the model, we have assumed that the most important direct influence is given by the amount of the unemployment subsidies. The bigger will be the subsidies, the bigger will be the lack of interests of people to find a job. Their attitude, as a paradox, ist as economic rationally as it can be. If the unemployment subsidies is too big, then, for a little higher income as the one when he had not work at all, a worker would try far harder. The greatest indirect influence is a result of investment, which will come at the and to new jobs. This index will be calculated the same way as GDP or GDP allocated to the development of employment market.

IInvest

IIndemSŞomajttt

ttt

2/1

1/

−−

−λ=

where: St = unemployed persons, Indem = unemployment subsidies, Inv = investments. Population younger than 15 and population older than 64 These percents of population from metropolitan areas are not correlated with indexes,

because of the fact that they officially have not jobs. That is why they are not in the field of our interest in this study. Its symbol in the model is Zt .

The final form of the prognosis model of population from metropolitan areas is the following:


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( ) ZIInvest

IIndemSI p

ISal

IC

I LpPIBdMW

IP

IPIBYP t

tt

ttt

tt

tt

tt

tttt

tt

tttt +λ++β+α=

−−

−

−

−

−

−−

−

−−

2/1

1/

1/

1/

1/

2/1

1/

2/1

Im

..

V. Final considerations: A prognosis model is useful every time a forecast is required. But no matter how rigorous it

would be, there are always residual variables. The prognosis model of population from metropolitan areas could be verified with public information, especially from Romanian yearbook. Romania is a member of European Union from almost a year, and the advantages are obvious: economic growth, investments, a growing stock market and trust in the free market.

As metropolitan areas concentrate the greater amount of the wealth of nation, meaning raw resources, human resources and industrial capital, a trend of this model could give precious information about the national evolution, eventually about the future one. The forecast of population growth could then give to the economists information about the entire economy. If the analysis of the indicators has enough accuracy, the causes of the demographic evolution will be better understood and the economic forecast more precisely. In this model, demographic indicators and economic ones complete each other. The model also uses previous moment in time, and that is why its theoretic importance is based on the prognosis of the population by understanding of the economic circumstances which have preceded the demographic phenomena.

VI. Aknowledgements: We would like to thank the National Institute of Statistic of Romania and the Institute

of National Scientifically Research on Working and Social Protection of Romania. Data were published in Romanian Statistical Yearbook and in National Human Development Report Romania 2007 and were tremendous important for this study.

Bibliography

Basset, P., Balloux, Fr., Perrin, N. (1999). Testing demographic models of effective

population size, University of Lausanne Cenuşă, Gh. (1999), Theory of probability, Academy of Economic Studies of Bucharest

Publishing, Bucharest Hiraldo, F., Negro, J.J., Donazar, J.A., Gaona, P. (1996). A demographic model for a

population of the endangered lesser kestrel in southern Spain, Spanish Coucil of Research, Sevilla

McVean, G. (2003). Demographic models, Department of Statistics, University of Oxford Rogers, A.R., Harpending, H. (1992). Population growth makes waves in the distribution of

pairwise genetic differences, University of Utah, Pennsylvania State University, Mol.Bio.Evol. no.9, University of Chicago Publishing

Solis, P., Pullum, S.G., Frisbie, W.P., Demographic models of birth outcomes and infant mortality: an alternative measurement approach, Demography vol. 37, no. 4, 2000, Population of Association of America

Sora, V., Hristache, I., Mihăescu, C. (1996). Demography and social statistics, Economy Publishing, Bucharest

Watterson, G.A. (1985). The homozygosity test after a change in population size, Department of Mathematics, Monash University, Clayton, Victoria

Wardle, Glenda M., “A graph theory approach to demographic loop analysis”, University of Chicago, Ecology no. 79, 1998


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THE QUALITY OF INTEGRATION, COMPETENCE AND ROMANIAN CONVERGENCE

IN A KNOWLEDGE-BASED SOCIETY. LISBON’S TARGETS AND THE EUROPEAN COMMON OBJECTIVES FOR EDUCATION

AND LIFE-LONG LEARNING

Marta-Christina SUCIU Ph. D. Professor


Abstract. The paper illustrates the important role played by education and investment

in education for a competent management of the processes involved in order to assure the quality of integration as a key factor for Romanian convergence and competitiveness. The paper focus on the five common European objectives for education and lifelong learning established by the European Commission to be met by 2010, as part of the Lisbon strategy.

Key words: knowledge-based economy and society; Lisbon targets; lifelong learning. REL Classification: 4B; 4 C; 4 D.

1. Introduction

The Lisbon Strategy aims to make the EU into a dynamic, knowledge based economy with more and better jobs and a sustainable growth and development. In the area of education and training, the Member States agreed to implement the Lisbon Strategy by working towards common objectives. Their progress in this work would be monitored against a set of five benchmarks for improving education and training in Europe agreed first in 2002. Every year, the Commission monitors the progress made by the Member States. The last report published in 2007 shows that while some areas showed positive developments, overall progress was found to be lacking (Slow pace of reform in education and training threatens Europe’s competitiveness in the long term, 2 October 2007).

Education and training are crucial to the economic and social change induced by the knowledge-based eonomy and society. The flexibility and security needed to achieve more and better jobs depend on ensuring that all citizens acquire key competences and update their skills throughout their lives. Ján Figel’, the European Commissioner for Education, Training, Culture and Youth, said that “Top-quality education and training is vital if Europe


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is to develop as a knowledge society and compete effectively in the globalising world economy. Regrettably, the 2007 report shows that the Member States need to increase their efforts to make the EU's education and training meet the challenges of the 21st century. The message to policy makers in the Member States is clear: we need more efficient investment in human capital." (Slow pace of reform in education and training threatens Europe’s competitiveness in the long term, 2 October 2007, p. 21).

To ensure their contribution to the Lisbon strategy, Ministers of Education adopted in 2001 a report on the future objectives of education and training systems agreeing for the first time on shared objectives to be achieved by 2010. A year later, the Education Council and the Commission endorsed a 10-year work programme to be implemented through the open method of coordination. Approved by the European Council, these agreements constitute a coherent Community strategic framework of co-operation in the fields of education and training. "Education and Training 2010" integrates all actions in the fields of education and training at European level, including vocational education and training (the "Copenhagen process"). As well, the Bologna process, initiated in 1999 is crucial in the development of the European Higher Education Area. Both contribute actively to the achievement of the Lisbon objectives and are therefore closely linked to the "Education and Training 2010" work programme.

Ministers of education agreed on three major goals to be achieved by 2010 for the benefit of the citizens and the EU as a whole: to improve the quality and effectiveness of EU education and training systems; to ensure that they are accessible to all; to open up education and training to the wider world. To achieve these ambitious but realistic goals, they agreed on thirteen specific objectives covering the various types and levels of education and training (formal, non-formal and informal) aimed at making a reality of lifelong learning.

Systems have to improve on all fronts: teacher training; basic skills; integration of Information and Communication Technologies; efficiency of investments; language learning; lifelong guidance; flexibility of the systems to make learning accessible to all, mobility, citizenship education, etc. According to the last report in 2007 there is insufficient overall progress in Europe’s education and training systems towards the goals set in the Lisbon strategy for more jobs and growth. This is the main finding of the 2007 edition of the European Commission’s annual report on progress towards the Lisbon objectives in the field of education and training (Towards Common Principles of Flexicurity: more and better jobs trough flexibility and security." COM (2007) 359).

Lifelong learning supports creativity and innovation and enables full economic and social participation. In turn, it supports the achievement of the Lisbon guidelines for jobs and growth. These objectives can only be achieved by sustained long term efforts that would focus on ways to identify achievements and to direct effort to areas that are proving more difficulties. Thus the Council and the Commission prepare a joint report every second year; this report points to significant progress and challenges in education and training reforms.

2. Lisbon objectives 2010 in education and training

The 2007 report charts progress since 2000 in the light of key indicators and focuses on five education benchmarks agreed by the Member States. In 2007, reaching the EU benchmarks and goals for 2010 continues to pose a serious challenge for education and training systems in Europe, except for the goal on increasing the number of Mathematics,


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Science and Technology graduates. Unless significantly greater efforts are made in achieving the benchmarks, early school leaving, completion rates of upper secondary education and key competences for low achievers will remain ambitions for the EU even beyond 2010.

2.1. Early school leavers. EU Benchmark for 2010: Reduce early school leavers to 10%

One out of six young persons aged 18 to 24 in the EU still leaves education with no more than lower secondary education and currently participates in no form of education and training. The high number of early school leavers is an obstacle to developing a knowledge-based economy and greater social cohesion (figure 1).

Source: Eurostat (EU-Labour Force Survey).

Figure 1. Early school leavers

Share of the population aged 18-24 with only lower-secondary education and not in education or training, 2000-2006

There was continuous improvement in recent years in reducing the share of early school leavers, but progress will need to be faster to reach the EU benchmark in 2010. However, some of the new Member States already have shares of less than 10%.

2.2. Low achievers in reading. EU Benchmark for 2010: 20% fewer 15 years-old with poor reading skills

The need to improve the mastery of basic skills was recognized by the European Lisbon Council in 2000. Acquiring basic competences is a first step to participation in the knowledge-based society. However, at the age of 15 about 1 million out of 5 million pupils in the EU are low performers in reading literacy. While the share has decreased in some Member States (notably Latvia and Poland), according to available data, since 2000 there has been no progress at EU level (2003: 19.8%). Countries like Finland, Ireland and Netherlands are the best performers with only 10% or less low performers in 2003 (figure 2).


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Source: OECD PISA 2003 database.

Figure 2. EU Benchmark for 2010: 20% fewer 15 years-old with poor reading skills

In 2000 the share of low performing 15-year olds in reading in the EU was 21.3% (data available for 18 Member States only). According to the benchmark this proportion should decrease by one fifth by 2010 (and thus reach 17.0%)-figure 3.

Source: Eurostat 2006 database.

Figure 3. Key competences

Percentage of pupils with reading literacy proficiency level one and lower (on the PISA reading literacy scale) 2000-2006

While the share has decreased in some Member States (notably Germany, Poland and

Latvia), in most Member States it increased and performance at an EU level deteriorated (2006: 24.1%).

2.3. Upper secondary attainment. EU Benchmark for 2010: Reach 85% having completed upper secondary education

Full participation in the knowledge-based society requires that each individual is equipped with at least basic education at upper secondary level. The share of young people (aged 20-24) who have completed upper-secondary education has only slightly improved since 2000. (figure 4).


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Source: Eurostat.

Figure 4. Completion of upper secondary education by young people Percentage of the population aged 20-24 having completed

at least upper-secondary education, 2000-2006 There was thus little progress in achieving the benchmark of raising this share to at least

85% by 2010. However, some countries with a relatively low share, notably Portugal and Malta, have made considerable progress in the recent past. It should also be noted that many of the new Member States already perform above the benchmark set for 2010 and that four of them, the Czech Republic, Poland, Slovenia and Slovakia, and in addition Norway and Croatia, already have shares of 90% and above.

2.4. Mathematics, Science and Technology graduates. EU Benchmark for 2010: 15% increase of Mathematics, Science and Technology graduates

An adequate supply of highly qualified scientists is crucial for competing successfully

in the global knowledge-based economy. The number of graduates from higher education in the field of Math, Science and Technology is here essential (figure 5).

Source: Eurostat (UOE).

Figure 5. Growth of tertiary graduates from mathematics, science and technology fields in % Average annual growth rate 2000-2005, in %


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The number of MST graduates in EU 27 has increased since 2000 by over 170,000 or by more about 25%. The EU has thus already achieved the benchmark of increasing the number of MST graduates by 15% by 2010. More limited progress has been achieved as regards the second goal of reducing the gender imbalance. The share of female MST graduates has increased from 30.8% in 2000 to 31.2% in 2005. While Slovakia, Portugal and Poland showed the strongest annual growth in the number of MST graduates (more than 12%), Bulgaria, Estonia, Greece and Romania perform best as regards gender balance.

2.5. Participation of adults in lifelong learning. EU Benchmark for 2010: increase of participation in lifelong learning to 12.5% of the adult population

Lifelong learning (LLL) is fundamental, not only for the competitiveness, and economic prosperity of the EU, but also for social inclusion, employability, active citizenship and the personal fulfillment of people. Individuals must be able to update and complement their knowledge, competences and skills throughout life. The percentage of the working age population participating in education and training amounted to 9.6 % in 2006. Nordic countries, the UK and the Netherlands currently show the highest participation rates. Additional efforts by many EU countries are needed to reach the benchmark of a 12.5% participation rate in 2010 (figure 6).

Source: Eurostat (LFS).

Figure 6. Participation in lifelong learning

Percentage of population aged 25-64 participating in education and training in the four weeks prior to the survey, 2000-2006

The percentage of the working age population with tertiary education (in the 4 weeks

prior to the survey) was the highest in the nordic countries, the UK, Slovenia and the Netherlands (figure 7).


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Source: Eurostat (LFS).

Figure 7. Educational attainment of the adult population Adult population (25- to 64-year-olds) with tertiary attainment

In 2006 almost 23% of the working age population of the EU had attained tertiary

education, an increase of more than 3 percentage point compared to 2000. Finland, Denmark and Estonia were the countries with the highest share of population with tertiary attainment, while some Member States still had shares of less than 15%. However, in some of these countries tertiary enrolment has expanded considerably in the recent years.

* * *

As a conclusion the main findings of the last report 2007 with regard to the five

benchmarking in education and lifelong learning include: • There are still too many early school leavers: In 2006, about six million young

people (18-24 years old) left education prematurely in the EU. This would need to drop by two million if the benchmark of no more than 10% early school leavers is to be reached. The best performing EU countries were the Czech Republic (5.5%), Poland (5.6%) and Slovakia (6.4%).

• More graduates from upper secondary school are needed: In order to achieve the EU benchmark of an 85% upper-secondary school completion rate by 2010, an additional 2 million young people (aged 20-24 years) would need to finish upper-secondary education. In this area the best-performing EU countries are the Czech Republic (91.8%), Poland (91.7%) and Slovakia (91.5%).

• The EU has succeeded in meeting the target for mathematics, science, and technology graduates: If present trends continue, over 1 million students will graduate in mathematics, science and technology (MST) in the EU in 2010, compared to the present (2005) level of 860 000 graduates per year. These levels already exceed the benchmark. The best-performing countries in terms of MST graduates per 1 000 young people (20-29) are: Ireland (24.5), France (22.5), and Lithuania (18.9).

• There is insufficient participation in lifelong learning activities by adults: An additional 8 million adults would need to participate in lifelong learning within any four week period in 2010 if the EU benchmark of 12.5% participation rate is to be achieved. The best-performing EU countries are (2006): Sweden (32.1% in 2005), Denmark (29.2%) and the United Kingdom (26.6%).


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• Improvements are needed in literacy levels of fifteen year-olds: About one in every five 15-year-old pupils in the EU is presently a poor reader. To reach the benchmark would need a further 200 000 pupils to improve their standard of reading. The best-performing EU countries are: Finland (5.7%), Ireland (11%) and the Netherlands (11.5%).

Besides the five benchmarks presented, two additional concrete goals have been decided by the European Council to be achieved by 2010: The Lisbon objective of increasing per capita investment in human resources and the Barcelona objective of ensuring that 90% of all children, aged from 3 years to the beginning of compulsory schooling, should be enrolled in pre-school day-care institutions. Furthermore the Council has decided that progress of education systems in Europe should be monitored with reference to the overall educational attainment of the population.

• Participation in pre-school day-care institutions Within the general target to increase the participation in pre-school day-care institutions

there is some evidence that participation in pre-primary education has a positive impact on performance during compulsory schooling, including on early school leaving, in particular for children coming from socio-economically disadvantaged family backgrounds. In 2005, 86% of 4 years old children were enrolled in education. Between 2000 and 2005, enrolment of 4 year olds increased by about 3 percentage points. In 2005 in France, Belgium, Italy and Spain nearly all 4-year olds (over 99%) participated in education.

• Increase investment in education and training Investment in human capital through education and training is central to strengthening

Europe’s position in the knowledge economy and to increasing social cohesion. Between 2000 and 2003, public spending on education as a percentage of GDP increased considerably in EU Member States. However, in 2004, the upward trend stopped and there was a slight decline compared to the year before, but as a result of GDP growth in absolute terms public education spending still increased.

Rates of private investment in education appear modest in most Member States compared with the leading countries in the world, particularly in higher education. One can observe strong difference in investment levels between countries (figure 8).

Source: Eurostat (UOE).

Figure 8. Investment in human resources

Total public expenditure on education as a percentage of GDP, 2000-2004


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Other indicators indicate that the pace of reforms in education should be accelerated. For example, most EU school pupils are not yet taught at least two foreign languages from an early age, as requested by the Barcelona 2002 European Council. An average of only 1.4 and 1.5 foreign languages per pupil are taught in the Member States in general lower- and upper-secondary education respectively. Moreover, the financing and efficiency of educational systems remain of high concern. Studies repeatedly show that the most effective area to increase investment is in pre-primary education. As regards higher education, although public investment in education and training as a percentage of GDP has grown markedly since the adoption of the Lisbon strategy (from 4.7% to 5.1% of GDP), progress has stalled in recent years and the EU would need to more than double the amount it invests per tertiary-level student (i.e. an increase of around € 10 000 per year) to match the spending level in the USA. This consists almost entirely of private investment.

3. Monitoring progress towards Lisbon objectives in education and training.

Romanian case The Council Conclusions adopted in May 2007 on the monitoring of progress towards

the Lisbon objectives in education and training identified a coherent framework of indicators and benchmarks. The Commission publishes, since 2004, annual “Progress reports” monitoring the improvements in education and training systems in Europe. The Commission Progress Report 2007 applies, for the first time, the coherent framework of 16 core indicators and five benchmarks, where data are available, for analysing progress since 2000. In preparing the report the Directorate-General for Education and Culture has cooperated closely with Eurostat, CRELL of the Joint Research Centre, Ispra, and the Eurydice European Unit.

Romanian case. Challenges and opportunities for LLL in Romania

Starting in the year 2000 and intensifying in recent years, some progress towards

achieving a European level of education has been made in Romania (this is obvious also within the previous figures, figures 1 - 8 that includ data regarding Romania). This, as well as the actual situation of the education system after two major stages in educational reform, should be taken into account when studying the developments in LLL and adult education in Romania.

The National Action Plan for Employment (NAPE) provides a specific set of policies to sustain lifelong learning. The NAPE emphasizes short and medium-term measures to increase employment, assist lifelong learning, and increase labour market effectiveness. The goal is to adapt more rapidly to economic changes and to ensure better access to the labour market, while avoiding discrimination and social exclusion. However, existing policies mainly address current problems and needs.

Romania has not finished the development of a national integrated strategy for lifelong learning yet. Nevertheless, the decision-makers’ and experts’ interest in the development of a coherent national lifelong learning strategy has increased. A broader national concept of life-long and life-wide learning and a joint vision of the Romanian human resources development over the next decades and years are still to be developed. In consequence, lifelong learning principles have been included as priorities in education, continuous training and employment policy documents. The National Development Plan 2007-2013 (NDP) and the Sectorial Operational Programme for the Development of Human Resourses (SOPDHR) are the main Romanian policy documents for attaining the benchmarks set in the Lisbon Agenda for education, training and employment. Some lifelong learning objectives are also explicitly found in sectorial strategic documents, such as: The National Employment


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Strategy 2004-2010 (MLSSF, 2004), The Short- and Medium-Term Strategy of Continous Training 2005- 2010 (MLSSF, NAE, MER, NCAT with support from the Sectorial Committees, 2005), The Ministry of Education and Research Strategic Guidelines for 2006-2008.

The main challenges for lifelong learning in Romania are: • low rates of participation in lifelong learning among young people and adults-

analyses carried out in recent years in relation with the participation of young people and adults in education and training show that Romania is among the last countries in Europe for such indicators as: participation of 25-64 year olds in education and training, the early school-leaving rate, the share of 15 years olds with the lowest performance levels in basic skills;

• neglect of learning outside the institutional framework (non-formal and informal learning)-as shown by the data provided by the National Council for Adult Training, at the end of 2007, Romania registered some important progress both in the number of centres for the assessement of adult skills, and the number of people who received certificates attesting their skills and competences. Nevertheless, the skills and competences aquired in non-formal and informal contexts have still little relevance in the context of formal education acquired in the education and training system;

• prevalence of traditional methodologies in the education system, which are centred more on teaching and less on learning- relevant data on this matter were shown in the World’s Bank 2006 study, Studiul longitudinal de monitorizare şi evaluare a Proiectului pentru Învăţământul Rural (Longitudinal Monitoring and Evaluation Study of the Rural Education Project), based on a systemic survey of a representative school sample from rural areas. According to the study, teachers show little ability to use interactive teaching and learning methods;

• significant differences in opportunities and educational resources between rural and urban areas-the report Starea învăţământului din Romania - 2006 (Situation of education in Romania – 2006) highlights important differences between residence areas for most of the evaluation indicators of the education system;

• differences in the education stock, given the limited access to education of those categories of the population which are socially excluded (extremely poor people, people with special needs, Roma population etc.);

• limited access to digital information -according to a report of the Association for Information and Communication Technology, the growth of ICT consumption in Romania is expected to continue in all fields in the next years. An annual global study (WITSA/Global Insight) places Romania among the first 10 countries in point of ICT growth dynamics;

• the prospect of decrease in the number of population in Romania (by 11% until 2030, according to EU forecasts) and its consequences on the development and use of competences-according to a study of the Statistical Office of the European Union (Eurostat), the population of Romania will constantly grow older by 2050. The number of people aged over 65 will represent almost 30% of the total population in the same year, compared to the current level of 15%. The total population of Romania will gradually decrease to 17.1 millions in 2050.

Based on these challenges a set of priorities have been designed: • Ensuring access to education and lifelong learning; • Extending learning to cover all fields of life; • Developing competences related to a knowledge economy and society; • Developing institutional capacity for lifelong learning.


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4. Final remarks. Preparing for post-2010

The following areas will need particular efforts in all the Members countries: • Raising skill levels. People with low skill levels are at risk of economic and social

exclusion. Continued high levels of early school leaving, low participation in lifelong learning by older workers and the low-skilled, and poor skill achievement among migrants cause concern in most countries. Further, future labour markets in a knowledge-based economy will demand ever higher skill levels. Low skills will become an ever greater challenge;

• Lifelong learning strategies. Most countries have made progress in defining unified strategies. Within such frameworks, progress is evident in pre-primary education, qualification frameworks and the validation of non-formal and informal learning. However, innovative learning partnerships and sustainable funding for high quality, efficient and equitable education and training still elude many countries. Particular attention must be given to lifelong guidance. Ensuring that reforms are effectively implemented is an important challenge to all;

• The knowledge triangle (education, research and innovation). The knowledge triangle plays a key role in boosting jobs and growth. So it is so important to accelerate reform, to promote excellence in higher education and university-business partnerships and to ensure that all sectors of education and training play their full role in promoting creativity and innovation. Education is fundamental to the knowledge triangle. Centres of excellence which focus on teaching, research and knowledge transfer are vital. Much more needs to be done to enable higher education and business to work in partnership. Research and innovation need a broad skills base in the population. Excellence and the key competences, particularly those relating to entrepreneurship, creativity and learning-to-learn, must be developed in all systems and levels of education and training.

The Education and Training 2010 work programme provides practical support for Member States’ education and training reforms. Significant progress has been achieved since the programme was launched in 2002. Yet education and training reforms need time to bear fruit. Major challenges persist, new challenges have emerged. The efforts done need to be continued and indeed made more effective.

Reflections on an updated strategic framework for European cooperation in education and training should therefore be given a higher attention. Given the crucial role of education and training to the Lisbon Strategy for Jobs and Growth, this must be closely associated with the future development of the Lisbon process.

In order to amplify Romanian convergence in the content of promoting a knowledge-based economy and society on the European level, competence and the quality educationa and traing systems have to pay a significant role in the future.

Bibliography Ancheta Forţei de Muncă în Gospodării (Household Labour Force Statistical Survey), NIS,

AMIGO 2006; Baltac, V. Romania – un sector IT dinamic (Romania – A dynamic IT sector), The

Romanian Association for Information and Communication Technology, 2005 Dezvoltări recente în domeniul educaţiei şi ocupării în perspectiva ţintelor europene. Cazul

României (Recent Developments in Education and Employment in relation to the European Benchmarks. Romania), The Institute of Education Sciences, 2006;


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"Delivering lifelong learning for knowledge, creativity and innovation", Joint Progress Report of the Council and the Commission on the implementation of the 'Education & Training 2010' work programme, Brussels, 2007

Drepturile persoanelor cu dizabilităţi intelectuale: accesul la educaţie si angajare in munca în România (Rights of People with Intellectual Disabilities: Access to Education and Employment in Romania, Open Society Institute, 2005

Landmarks for a national lifelong learning strategy, 2nd variant, The National Council for Continuous Education and Training, Bucharest, 2007

Maliţa, L. “România bate cu timiditate la porţile Internetului (Romania is shyly knocking at the Internet door)”, in Social Information Science Magazine, year II, no. 4, 2005, pp. 29-42

Mărginean, I. (coord.) (2004). Condiţii sociale ale excluziunii copilului (Social Conditions for Child Exclusion), Romanian Academy, National Institute of Economic Research, Institute for Research into the Quality of Life

National Report on the implementation of the Education and Training 2010 Work Programme in Romania, Bucharest, 2007

“Progress towards the Lisbon Objectives in education and training, 2007 Indicators and Benchmarks”, (SEC(2007)1284), October 2007

Reasons for an Integrated Lifelong Learning Strategy in Romania, Institute of Education Sciences, 2006, Lanmarks for an Integrated Lifelong Learning Strategy, Institute of Education Sciences, Bucharest, 2006

Sectorial Operational Programme for the Development of Human Resources (Ministry of Labour, Social Solidarity and Family, 2006).

Slow Pace of Reform in Education and Training Threatens Europe’s Competitiveness in The Long Term, IP/07/1431, Brussels, 3 October 2007

Starea învăţământului din România - 2006 (The Situation of Education in Romania – 2006), Ministry of Education and Research, Bucharest, 2006

Studiul longitudinal de monitorizare şi evaluare a Proiectului pentru Învăţământul Rural (Longitudinal Monitoring and Evaluation Study of the Rural Education Project), World Bank, 2006

Towards Common Principles of Flexicurity: more and better jobs trough flexibility and security." COM (2007)


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CONTEMPORARY FISCAL POLICY UNDER THE INCIDENCE

OF THE NEW PARADIGM OF ECONOMICS, THEORETICAL-METHODOLOGICAL PLURALISM

Niţă DOBROTĂ Ph. D. Professor

Academy of Economic Studies, Bucharest Cornel IONESCU

Ph. D. Senior Lecturer Spiru Haret University, Bucharest

Abstract. Throughout centuries, economic schools and streams of thinking have dealt with economic problems, the problem of fiscality, of budget expenses and budget deficit in various individualist manners. In the last few decades, these issues have become so complex and dynamic, that none of the existing streams alone is capable of covering them.

From a limited approach in point of space and time, the analysis of fiscal policy and especially the analysis of the state budget deficit may be reduced to studying the benefic and/or malefic interdependencies between Romania’s fiscal policy and the dynamics of its national economy. In order to perform this operation, at present, it is necessary to thoroughly delimit the specific concepts, and at the same time, to specify the view and adequate tools (to the historical stage) that highlight the interdependencies between the reflected processes. Interdependencies concern both the senses of evolution and those expressing the qualitative sides of the respective processes.

We will further study and analyze all these multiple interdependencies of growth, development and modernization of economy on the one hand, and fiscal policy as well as budget deficit on the other, in the spirit of theoretical pluralism, or, in other words, of a scientific theory. “We live in a period in which the specialists in macroeconomics issue new hypotheses in connection with the mechanisms governing economy – E. Phelps observed- and try to find a new paradigm. Pluralism is the best methodological solution, its periodical manifestations being impossible to avoid anyway.”

Anticipating, we specify that in case of fiscal policy, the pluralist approach refers to a certain joining of principles and rules that are at the basis of aggregate demand and aggregate supply. At present, the supporters of the supply theory are in an obvious offensive position. They define their conception by the requirement of “supply oriented tax reduction”.

More concretely, the respective conception is outlined by three exigencies: (a) Fiscal reforms should contribute to increasing the stimuli by reducing taxes on

the last currency unit of income, and by reducing marginal taxes, respectively. (b) Taxation fiscal system should be less progressive, which means reduction of the

tax burdens imposed on the persons with high income. We are speaking about applying the theory of Laffer’s Curve, which says that high and progressive taxes may lead to reduction of state fiscal incomes.


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(c) The respective system should be conceived in such a way as to stimulate productivity and supply, not to manipulate aggregate demand.

It follows from above that pluralism implies a new relation between the theory of aggregate supply and demand when substantiating fiscal policy and not giving up the theory of Keynesian and Neo- Keynesian extraction.

Key words: macroeconomic decision; the character of state intervention in economy;

budget deficit; theoretical-methodological pluralism. REL Classification: 8I; 8K; 13F

1. Pluralist theoretical-methodological principles for approaching and apprecia-

ting the present macroeconomic problems One of the methodological principles used for analyzing and appreciating the dynamic

relation between a country’s economic development and its fiscal policy may be formulated as follows: ample specific interdependencies from purpose to means and vice versa, to economic development with macroeconomic policies, in the present case, with fiscal policy.

Recent historical reality attests to the fact that the target function of any macroeconomic strategy and policy consists in economic growth and development, fiscal policy being, beside the other sectorial macroeconomic policies, a means to support the target function. This means that any analysis of the field implies comparing the dynamics of a country’s economy, whichever it may be, (development/regress, extensive development/intensive development, economic boom/economic recession) with the coordinates of fiscal policy promoted in the same interval of time or in successive intervals. After establishing the general characteristics of the country’s economic dynamics, one must highlight the causes that led to one kind of economic evolution or another, one of the causes being fiscal policy. The considerations above regarding the macroeconomic dynamics as target function and fiscal policy as means of reaching the purpose, does not imply a unilateral relation between the two processes. On the contrary, it is interdependencies that manifest between the dynamics and economic state of a country and its fiscal policy.

An interesting, original way that reflects the relation between a people’s economic and its fiscal system was stated by Mihai Eminescu in his articles. In one of his editorials written for “Timpul” (The Time) he expressed a conception of universal significance regarding the relationship between economy, type of state and fiscality. “No government, no party – Eminescu wrote- can choose the budgetary-fiscal policy at its will. The economic state of a country, at a certain moment, requires the state, the public power, the government, a certain financial-budgetary system. What the government can do, what the members of the government can do is to try and act in such a way that the fiscal measures have in view, above all, the change of the economic system an the people’s social condition.” (Mihai Eminescu: “The State. Its Functions and Mission”). It is obvious that Eminescu considered that fiscal policy played two parts: that of reflecting the country’s state of economy and that of active, transforming factor for the economic system.

The interdependencies among the human community types, kinds of state and economic systems, on the one hand, and fiscal-budgetary policies on the other, were synthetically characterized by sociologist and economist Joseph Schumpeter : … “a people’s spirit, cultural level, social structure, political facts, all this, and many others may be found in its fiscal history”, J. Schumpeter postulated. “He who is able to listen to this message will


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understand the concerns of mankind’s history much better” (Schumpeter Joseph: History of Economic Analysis).

From the above quotation, one may find that the fiscal policy promoted by various types of states has always reflected not only the economic state of human communities, but also the people’s state of mind, its social structure.

Another principle of great historical opening and great importance within the framework of our theme refers to the unity between the history of fiscal policies and types of political power, the latter being, in their turn, reflections of various kinds of human communities and their economic state.

Having in view that the interdependent processes analyzed in the present paper occurred in different historical periods, that economics appeared much later than the state and its fiscal policy, we resorted to divisions into periods and sub-periods in which the interdependencies manifested with different senses and intensities. Moreover, some of these interdependencies were reflected by empiric knowledge or momentary intuition of the political (state) leaders, while in the last three centuries they were reflected by ever more thorough scientific knowledge, successfully administered by macroeconomic decision factors.

In a general diachronic manner, we indicated the ways and mechanisms that ensure state income, starting from its functions assumed by the members of the government. In parallel, there are ideas and theories that reflected these problems in the period which may be called prehistory of economics, and therefore the prehistory of scientific substantiation of fiscal policy.

As our investigation bears the imprint of economics, a science born in the second half of the 18th century, we marked and characterized the leap to economic thinking in modern times, an epoch characterized by the appearance, development and consolidation of the capitalist economic system.

When conceiving and making the analysis of the interdependencies between Romania’s present fiscal policy and the target function of its economic development, we turned to good account the methodological principle that indicates the relationship among the general theory of fiscality, the standard theory of the respective problems and the multitude of concrete aspects of its manifestations and practical implementation. For this purpose, we used Nicolas Georgescu Roegen’s conception, an American economist of Romanian extraction: “The assertion that the fundamental principles of economy are universally valid may be true only in point of their form”, Roegen stated. “Their content is determined by the institutional framework. In absence of this institutional content, principles are sheer void generalities”. (Nicolas Georgescu Roegen: “The law of Entropy and the Economic Process”).

Actually, in other fields too, specific problems are judged based on the relation between their essence and form. “Each artist must represent his music by the essence of his own roots” a great specialist asserted. “Otherwise the artist is an empty balloon, which directly deflates if stung. Unless you represent your roots, you have no identity”.

It is in the spirit of this principle that we conceived the part referring to Romania, to the present interdependencies between its fiscal policy and its social-economic dynamics (economic growth, sustainable economic growth, economic development, extensive and/or intensive economic development, general-human development, etc.), in the sense that we took into account the concepts, principles, theories and standard models substantiated and polished in the capitalist market economic environment and the state in law (N.G. Roegen’s so called “empty boxes”). We tried to fill them in with the social-institutional content, extremely varied and contradictory in Romania. This principle is of special interest for understanding the content of fiscal reform in Romania.


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The analysis of the place and role of fiscality in modern society (as fiscal system and social policy) undoubtedly implies studying the efficiency of this specific social action.

In specialized literature there are references to and appreciations on the social-economic efficiency of the fiscal system and the apparatus of financial-budgetary administration. The efficiency of this system is often appreciated from the viewpoint of integral and timely collection of the legally established taxes. Taking into account a strong tendency towards tax dodging, such an objective is worth the whole attention of state authorities. The already mentioned objective should be attained at the lowest possible costs, expressed in the relative number of employed persons in the sector, and in the expenses with the personnel and adequate infrastructure.

This manner of considering the fiscal system efficiency is strictly administrative, in the short run. This view has to be completed by the analysis of fiscal policy efficiency seen from the angle of a country’s economic-social dynamics in the medium and long run. This approach is much more complex, efficiency of fiscality being much more difficult to measure. Nevertheless, it does not mean that its existence or non-existence and the directions of its evolution are impossible to measure. Here are the terms of the problem of fiscality efficiency in the long run.

“ The power to impose, indispensable for the existence of any civilized government – an American document states- is exercised on the basis of the presumption of an equivalent refunded to the tax payer concerning the protection of the person and his property. We are talking about the protection of the value of such properties, i.e. maintenance and creation of public advantages for the tax payer’s benefit. That is why, in case the power that imposes the taxes cannot perform these services, in case it cannot be benefic for the taxed person/property, and the respective taxation takes the form of extraction.” (A Synthesis of the USA Supreme Court regarding taxes, see Marian Gîdiuţă: “Fiscal Policy and Its Influence on the Macroeconomic Balance”).

Some economists express taxation transformed into extraction by “state’s capture”. In the chapters and paragraphs dedicated to the role and functions of the state, to the

efficiency of fiscal policy, we will make the required considerations regarding the services offered by the public power to the tax payer, no matter who they are.

At theoretical-methodological level, we paid special attention to budget deficit, which is one of the most controversial macroeconomic problems. The most general conceptual delimitation of budget deficit at the level of a country is the following: “the negative balance of the state budget, in the sense of scheduling and executing budget expenses higher than the income of the same kind in a certain time horizon, which is generally of one year.” (Dictionary of Economics).

Such delimitation of the state budget deficit mainly expresses the technical-financial side of the concept and process expressed in the notion. In the contemporary world, the problem of budget deficit is raised in new terms, this aspect being the main object of the present paper.

2. A pluralist theoretical approach of the present issues of budget deficit As shown above, the unprecedented complexity of the social, economic, ecological,

military issues in the contemporary world makes it impossible to clarify even one of them on the basis and in the spirit of only one stream of economic thinking.

As known, the multiple interdependence relations between the state functions, its fiscal policy and the country’s economic condition started to be analyzed and appreciated on scientific basis at the appearance of capitalism, of the national-state communities and when economics was constituted as an autonomous social science.


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The modern state was born at the end of a natural order completion-feudalism, in which the fatality of poverty started to vanish, the rigidity of social-economic statutes crashed all over Europe, making room to modern economy – capitalism. Wealth and poverty become categories of positive perception, susceptible to be oriented and modified. (Cornel Ionescu - “State Flourishing “).

Adam Smith, a Scottish economist whose work, “The Wealth of Nations” is already classical, explicitly admitted and described the essential part of the modern state, i.e. allotment of resources. Its function of redistributing the revenue in economy and society has completely changed the character of state intervention in economy.

In its evolution and development, economics was especially concerned with the problems related to national income redistribution. The streams of thinking, the economic schools, manifested in the last two or three centuries, analyzed and reflected in various manners the relation of interdependency between the role and the functions of the state, on the one hand, and taxation policy on the other. The respective reflections were in natural connection with the economic state and evolution in the economically advanced countries, and also with the prevailing ideologies in the epoch.

In the 18th and 19th centuries, with small exceptions, free competition capitalism prevailed. It was analyzed and appreciated by what was later called microeconomics.

Microeconomics was founded in the 20th century. In his work, “The General Theory of Employment, Interest and Money”, John Maynard Keynes deliberately introduced the state in the economic circuit, conferring it significant responsibilities in solving economic crises as periodical forms of market failure. More precisely, it was considered that it can play the part of regulator of the countries’ economy, fiscal policy playing an important part in this sense.

Nevertheless, the streams of economic thinking issued in various historical periods, reflections of specific social-economic states and expressing relatively well shaped political-ideological interests, were not only successive, but also concomitant. This situation is obvious for the present time.

Against the background of the increasing complexity of social, economic, political realities, the relation of the streams of economic thinking has considerably changed. The complex social-economic problems faced by a great part of the present world, that is obviously undergoing globalization, can no longer be analyzed only on the theoretical-methodological bases occurring within the limits of a single economic stream, whichever it may be. A change of paradigm is required, i.e. it is necessary to adopt theoretical pluralism, heterodox approach for the problems indicated above.

We have attempted to turn this methodological principle to good account in order to analyze budget deficit and its interdependencies with all the other present macroeconomic issues. We actually intended to use all the valuable theories and ideas both of neoliberal and neo-Keynesian nuance to give relatively useful answers to the problems created by budget deficits and public debt in case of most of the countries’ economies.

3. Conceptual delimitations concerning state budget deficit Any institutional-functional entity supposes the utilization of resources in order to

exercise their functions, no matter which they are. Each family, each administrative-territorial unit, each national-state community, and, more recently, each national state union needs special resources formed and sized by adequate means with a view to supporting the process of exercising the assumed social-economic functions. As the title of the present study indicates, we will further deal with the incomes and expenses of the national-state communities. Moreover, our analysis will be limited to contemporary modern and democratic states.


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The income and expenses of the national-state communities are structured and compare in different manners, according to the type of state, the level of the country’s economic development and the options made by the governing political factors.

In the United Kingdom of Great Britain and Northern Ireland, for instance, there are three conceptions regarding the “government”, and governmental income and expenses, respectively: the central government; global government sector, more precisely the globally governed sector; the public sector (unlike the private one).

The state central budget (Central Government) refers to the income and expenses at the disposal and under the responsibility of the central public power.

The globally governed sector (Global Budget) also includes the aggregate income and expenses of the authorities of local public administration, and those of the institutions and industries in public property.

Specialists say that in the public sector, the most ample component is the budget, which is at the central government’s disposal. Despite this situation, in macroeconomic theory, the social-economic correlations are followed by means of the global budget, of the so called global government.

The discussions related to the economic-social policies in the United Kingdom and to the budget deficit concern the income and expenses of the public sector. This reference makes sense because the deficit in the public sector influences the sum the government wishes to borrow from the financial markets.

In Romania there are the following concepts (instruments) to describe the income and expenses of the national-state community: state budget, local budgets, public budget, and general consolidated budget.

The state budget or the budget of the state central administration is the main financial instrument comprising the revenue mobilized at the state disposal and their distribution on categories of expenses within the limits of a budgetary-fiscal year. The state budget is under the form of an economic balance, of a document-plan, elaborated and administered by the government and authorized by the Parliament's vote.

Local budgets are financial instruments for administrative-territorial units with juridical personality: communes, cities, municipalities, districts of Bucharest.

The public budget is an annual document-programmed of the state, which reflects the entire public income and expenses of the country. Its structure is the following: state budget, local budgets, budget of state social insurances, etc. This budget mirrors the sum total of public financial resources and of the corresponding efforts at this level.

The general consolidated budget is the instrument of fiscal-budgetary policy which correlates not only the state budget income, but also their connections, especially the connection of the state budget deficit with all the other macroeconomic problems and processes (economic growth, occupation of labor resources, inflation, public debt, etc.).

In our country the state budget (with the respective income and expenses) is the greatest amount in the public income and expenses.

Without getting into the details of the problem, we think it is worth mentioning that the state budget income is made up of direct taxes, income taxes (profit, salaries, and interests), indirect taxes, turnover taxes (value-added tax), consumption taxes, no fiscal taxes, etc.

The expenses supported by the state budget are the following, presented at random: education, culture, science, health, social protection, public order, national defense, public infrastructure, natural environment protection, etc.

As specified above, the state budget is the main part of the public budget. That is why comparing the state budget income and expenses are of greatest social and economic


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significance. The respective operation highlights, usually in one year, one of the three hypostases: budget balance, budget excess, budget deficit.

“The most general conceptual delimitation of budget deficit at the level of a country, of the state budget deficit is the following: state budget negative balance, in the sense of scheduling and performing higher budget expenses than the income of the same kind collected within a certain time horizon, generally one year.”

Such defining of the state budget mainly expresses the technical-financial side of the concept and processes lying at the basis of this concept. In addition, this vision on the budget deficit may be extended to the analysis of all types of societies and economies. Actually, some authors maintain that, regarded in this way, the budget deficit is not an up-to-date macroeconomic problem; it is rather a political administrative one. In order to become such a problem, this deficit should be correlated with all the other macroeconomic problems, based both on the theory of aggregate supply and on that of aggregate demand.

4. Budget deficit of the USA: a useful case study For a relatively exhaustive analysis of the place and part played by budget deficit

within the macroeconomic processes in the long run, we resorted to the case of the United States of America. We may say that in the USA there is an official statistics of the macroeconomic indicators, including the budget deficit indicator, ever since the year macroeconomics was born as a science. This fact was marked by the classical work: “The General Theory of Employment, Interest and Money” issued in 1936 by the English economist John M. Keynes.

In the period 1936-2006, out of the 70 fiscal years, their absolute majority ended in deficits (58), only 12 fiscal years ending in excess. We will further mention the fiscal years that ended with surplus, the absolute amounts of the surplus being given in brackets, expressed in current USA dollars: 1947 (4 million); 1948 (11.7 million); 1949 (600 million);1951 (6.1 million); 1956 (3.9 million); 1957 (3.4 million); 1960 (0.3 million); 1969 (3.2 million); 1998 (70 million); 1999 (124 million); 2000 (237 million);2001 (127 million).

From the data above we can see that the 12 fiscal years were in the 1940’s (1947, 1948, and 1949) and at the turn of the century and millennium (1998, 1999, 2000, and 2001). From 1961 to 1997 included, for four decades, except the year 1969, all the fiscal years ended in deficit.

Many specialists in the field make the connection between the budget state (in excess, in deficit or balanced) and the stages of the economic cycle over an average term, of the business cycle. This would mean that the 1940’s and 1990’s, that ended in excess, would correspond to stages of economic boom, and the fiscal years in the 60’s, 70’s, 80’s and 90’s would correspond to a prolonged stage of economic recession. It is obvious that reality was different, as the condition of the USA general budget cannot be explained by the macroeconomic cyclic fluctuations, by economic booms and recessions within the limits of an average economic cycle.

The dimensions and dynamics of the USA federal budget should be appreciated both in nominal and in real terms. In 1936, this deficit was of 4,304 million dollars. Worth mentioning is the fact that over 50% of the federal budget expenses were supported by budget deficit, by the income collected from various deficits financing ways, respectively. In 1945 the deficit reached the sum of 47,553 million dollars, in 1968- 25,161 million dollars, in 1978- 59,168 million dollars, in 1986 – 221,140 million dollars. In 2004 the USA federal budget deficit reached the record sum of 412,553 million dollars.

Without simplifying the macroeconomic correlations, we cannot help noticing a certain connection between the amount of budget deficit and the federal expenses for military purposes. In 2004, for instance, military expenses amounted to 405 billion USD and


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budget deficit was of 412.5 billion. For compensating reasons, the following 6 military powers (Russia, China, France, Japan, the United Kingdom, and Germany) together allotted for the army less than 300 billion USD.

In order to appreciate the amount of the American budget deficit, we will compare it with the amount and dynamics of USA GDP and with the amount of federal expenses. We have made up the following table, using the official data of the country.

USA budget deficit in relation with the federal expenses – in million USD

Table 1 Federal Expenses Budget Deficit

Years

GDP Abs. %GDP Abs. %GDP %Fed. Exp 1960 526 92.2 17.5 3.3 -0.6 3.6 1970 1028 195.6 19.1 2.8 -0.27 1.4 1980 2789 590.9 21.2 73.8 -2.31 12.4 1990 5803 1251.7 21.5 220.5 -3.92 17.6 2000 9817 1778.4 18.2 +236.9 +13.2 +13.2 2004 11734 2292.3 19.5 412.5 18 18

2004/1960 2220% 2485% - 12340% - - Source: The World Almanac and Book of Facts, 2006, World Almanac Books, N.Y., 2006, pp-91-93; World development indicators 2004, the World Bank, 2004, p.16

First we would like to specify that the fiscal year 2000 is an exception, compared to

the other fiscal years, as it is one of the years in which the USA federal budget ended in surplus.

The absolute amounts dynamics of the three macroeconomic indicators (GDP, federal expenses and federal budget deficit) were different in intensity. In the fiscal year 2004 compared to 1960, the American GDP increased by 2,220% in each decade, i.e., it doubled as a rule. Compared to this GDP increase, the federal budget expenses were even more increased, by 2,485%, at the expense of increasing the budget expenses in GDP, from 17.5% in 1960 to 19.5% in 2004.

It follows that the amount of the expenses in GDP did not have a linear evolution. In 1990 it was of 21.5 %. At a first evaluation, one may say that the absolute and relative rising tendency of the federal budget expenses stands for the increase of the part played by the state in economy and society. The problem requires, nevertheless, other explanations, too. Of great importance were, in this sense, the USA military engagements, fight against terrorism included. For instance, in 2005 compared to 1998, the USA military expenses increased from 220 billion USD to over 400 billion USD. In other countries with great military expenses the rises were temperate, as follows: in Russia these expenses increased, within the above mentioned interval, from 53.9 to 65 billion USD; in France – from 36.7 to 55.9 billion USD.

5. General (cumulated) effects of the state budget deficit (positive/balanced;

negative/unbalanced) Both in the past and at present, in countries with advanced democracy and in

countries with dictatorial governing, budget deficit has been considered an unforeseen fiscal failure or a negative effect induced by poorly substantiated fiscal policies and a faulty (even fraudulent) administration of public power resources.

The specialists in macroeconomics unanimously appreciate that macroeconomic problems, starting with macroeconomic growth, continuing with efficient recovery of labor resources, with monetary, budget, external, etc equilibrium, form a system in which there


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occur either virtuous circles or vicious circles, which indicates that the governess failed in their attempt to give the economy of the country a positive sense.

In this spirit, some authors postulate that the budget deficit consists in “the negative balance of the state budget, in the sense of scheduling and executing certain budget expenses that are higher than the income of the same kind in an economic-fiscal year.”

Scheduling and executing a state budget with deficit may result, in the medium and /or in the long run, in getting the country (the state) into debt, in increasing of public debt, or in additional economic resources. The first situation was appreciated by B. Friedman quite harshly. He said: “We live well, accumulating our debt and liquidating the physical and/or financial assets. America takes part in a party, leaving the bill for the future. The future federal expenses will mean a lower living standard for the American citizens, a lower influence and importance of American companies in the world business”. In the latter case, budget deficit is an additional economic resource, which requires maximum efficiency in administration. It should be higher than the efficiency of fiscal income usage. In order to become an economic resource, certain conditions are required, which, as already said, get connected in virtuous circles. V. Vosganian specifies that “Budget deficit is a form of the state implication in controlling the macroeconomic equilibrium. If the deficit is financed by un-inflationist means and is benefic ally correlated with other macroeconomic objectives, state budget deficit may be a public investment.”

As shown above, the state budget is a deed, a political instrument by which the government’s responsibility is decided at economic level, by which one passes from the clear image of feasible combinations of income distribution in society, an image outlined by positive economics, to decisions based on ethical considerations, to what should be, according to normative economics.

This relatively recent preoccupation of economics was generated and stimulated by the conclusions the researchers in the field have reached: “both a drastic intervention of the government in economy and too great inequality of income may be harmful to economic growth, affecting mainly the quality of the growth and development factors.”

The three basic tasks of the government in a mixed market economy have been the following:

▪ to ensure steady rules for private property protection; ▪ to ensure effective competition and free exchange of goods and services; ▪ to ensure the legal framework for bankruptcy and industrial reorganization. Lately, new and complex problems have occurred and become challenges for the

governments in the countries with market economy: ▪ to promote macroeconomic stability, occupation of manpower included; ▪ to ensure fair distribution of the income and wealth; ▪ to promote efficient allocation of productive resources for alternative utilizations. These new objectives and challenges for the governments, their successful approach

and solutions will further be debated upon from the viewpoint of the state budget deficit. Here is a specification in point of principles and methodology: the state budget being,

in the first place, a political act of public power, the budget deficit should benefit from a credible explanation. “As a consequence, credibility of the objectives funded by means of budget deficit is decisive. The amount of this deficit related to funding constraints is appreciated and negotiated politically according to the objectives, those development targets sustained by budget deficit, by the resources covering this deficit.”

Concretely there are three approach possibilities to formulate an appreciation on the priority function of the budget deficit. In the first place, the ratio between investment amount and that of consumption is analyzed, taking into account all the resources used for


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budget deficit funding, which leads to a theoretical-doctrinaire mixture: the theory of aggregate supply and the theory of aggregate demand.

In the second place, a structuralism and marginal’s analysis of the already made, credible, agreed upon investments is required for differentiating the investment amount in economic objectives that create new value and investments in social-cultural infrastructure, civil building included.

In the third place, it is useful to analyze whether the resources employed for budget deficit funding are oriented towards civil or military expenses.

Bibliography Dictionary of Economics of the Department of Economics and Economic Policies in AES,

second edition, Economic Printing House, Bucharest, 1999, p. 1555 Dictionary of Economics –The Department of Economics and Economic Policies, p. 155 Dictionary of Economics. Second edition, Economic Printing House, Bucharest, 2001, p. 67. Eminescu, M., “The State. Its Functions and Mission” Friedman, B.M., Day of Reckoning, 1998, N.Y., p. 86 Georgescu Roegen, Nicolas, “The law of Entropy and the Economic Process”, Political

Printing House, Bucharest, 1979, p. 520 Gîdiuţă, M., “Fiscal Policy and Its Influence on the Macroeconomic Balance”, Economic

Independence Printing House, Piteşti, 2004, p. 56 Ionescu, C., “State Flourishing “Economic Printing House, Bucharest, 2001, p. 21 Lipsey, R., Chrystal, A., Positive Economy, Economic Printing House, 1999, p. 898 Phelps, E.S., Seven Schools of Macroeconomic Thought, in Samuelson-Nordhaus, Political

Economy, Teora Printing House, Bucharest, 2000, p. 713 Schumpeter, J., History of Economic Analysis, in Lipsey-Chrystal, Principles of Economy,

p. 657 Vosganian, V., Economic Message of the Romanian Right, Nemira Printing House,

Bucharest, 2006


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RESPONSIBILITY AND SOCIAL COHESION – ESTIMATION CRITERION FOR ECONOMIC

AND SOCIAL INTEGRATION

Mariana IOVIŢU Ph. D. Professor

Academy of Economic Studies, Bucharest Abstract. After six years for implication of Lisabona Strategy in all the economic

and social policy in the UE cauntry and the another country who join the UE, the efforts was successful consolidated but many aspirations untouched.

The equal rights or opportunities of the European´s people-no discrimination, means a basic element and a european, universally accepted value.

The european challenges are keep up on the same framework but, they are rectifying in the new directions and context: the competition who are emphasize by the external space of UE, the population´s alarming aging as UE level, the energetics problems of source-price and security of production-distribution and fulness, the risk of ecological system, etc.

Key words: the responsibility of contractor; the “profitable treble line”; the work-

flexisecurity.

1. The corporate social responsibility-integrated component of competitivity The concept of CSR is less used in the new integrated country of UE; it was

improuved at the national level by the transnational corporations. The model of “social economic market” was innovate by occasion of UE summit,

when Angela Merkel proposed it, like an one of the most important component in the europen system, adapted to the human been not only in the business world. CSR imposed as a concept who implies many objective, mechanismes and instruments who need demonstrate the efficiency of the new vision about the sustainable society.

This concept, CSR, received new dimenssions since the social problems, labour force and equal opportunities was represented at the UE level like the three forces who manifested interests and preocupations to the fondamental objectiv: the modernisation of european economies and creation of a new labour market.

Since 2001, the concept CSR was incorporated in the Green Cart like a component of Lisabona Strategy but, it was not strictely includet in the social european policy. The


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importance of CSR increased till 2006, when the divergence of oppinions between european companies and NGO on the europen market, claimed a new coordinates without conflicts.

Now, Corporate Social Responsibility has receive an important place because represents, in the same time, a modern concept and an inovation instrument at the european and international level.

The European Commission defines the CSR as a concept who determines the companies to decide voluntarily to a better world and ecological environment.

The activity of business companies it is influented by two type of factors: a) intern factors who ensure the investments in education of the employees and, b) external factors by the agreement to employ the disabilityies persons. In this case, the costs will be biger, augmented, because of employer´s economic potential (the condition of IMM) but, the CSR don´t be tackle only in the connection with the economic agent size.

In the context of relaunch of Lisabona Strategy the concept CSR can produce performant results in the business activity and in the civil society. The social responsibility cuold be legitimeted like a added value for companies and all society.

2. The responsibility of contractor and the “profitable treble line” This problem claim and ensure the ethical investments. The new challenge is to

find how the CSR can contribute to build a world we are living in the future. The ”profitable treble line” consist of joing all the criterions for promote and

obtain economic competitiveness and considerably economic increase. CSR concept has integrate six principales elements: business management,

employee relationship, occupational safety, client and supplier relationship, monitoring reporting system, community involvement.

The strategy of to start a national CSR policy consist in the atmosphere engaged all the participants in a fruitful dialogue for a cooperation of the social actors. The organizations who promote corporate social responsibility are WBCSD and The Global Compact.

The reputation,branding and marketing there are a variety of different contractor issues included in CSR.

3. An efficient social dialogue who assure the work- flexisecurity An efficient dialog consist in a social task for all the organisations who represent

the community and can identify the most important issues of the society. The capacity of create new workplaces (training and equal opportunities) is

dependent of the priorities and strategy of sustainable development, of ethics and corporate governance, environment and human rights.

One of the most important social moment of the 2007 year, Social European Triparty Summit (8 mars 2007) has represent an outstanding opportunity to plan a new document concerning the flexisecurity of work. The concept was proposed by Mr. President of European Commission, J.M. Barroso.

The necessity of work – flexisecurity represent an advertisements of the social reports and show as that the goals of the labour market are connected with the economic and sustainable developement objectives.


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The work – flexisecurity conteins two aspects: one, concern the all work problems who provides the evolution toward real european labour market and, the second, who intents to make as understand that the future of private-public-civil society most build on human flexibility-capacities.

In this direction, the “European Citizens Consultings” it is one of the most representative and consistent instrument and key factor in changing process. In the same times, the european social consultations proof the efforts to create the new relationships between european peoples.

That means an considerable effort of the european institutions who are facing the need of a coherent systemic change.

4. The integration of social responsibility in the community policy Same of the companies feel that CSR represent a component risk of management

strategy. The companies are involved in the comunity life and her reputation could be appreciate about the performences, humans and environmental responsabilities.

The european debates are focus on the disputed CSR. The controversary dialogue put in a diametrically position three parteners: the european NGO, who encourage compulsory measures packages, the companies, who endorse a voluntary policy and, the civil society who must be more and more implicated in CSR.

In this confrontation, European Commission is on the safe side and has demonstrate a limitation of her comportement in the decision versus the duty to involve CSR compulsory measures in the companies activity, attitude and behaviour.

This two oppinions, of the most important social actors, seem a provocation who manifest a conflict with all economic and social interests in UE, on the long run.

An another oppinion in this problem is declareted by the European Comisary Gunter Verhogen, who sign that the social responsibility implementation policy it is establish on the multiactors approach and on the voluntary measures.

A critical note: though the UE sign all the treatys and acts who protects the human rights at the international level, at the own geopolitical space, she have´t a clearly policys in the human rights.

At the european debats concerning the Berliner Declaration-25 of mars 2007, Hans-Gert Pöttering formulated same considerations about the great problems who involve UE:

-the solution of social approach who encourage the economic performances, -the feasible “social european model” -the new start of Europa in the XXI century, -the lieders decisions to establish a better and powerfully Europe for european

citizen atvantages. In the context of the european space calitativ development, the CSR manifest a big

effects at the employees and contractors level. All the people wants to feel that the companies care of they future and human long run development.


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Bibliography

Booker, Ch., Uniunea Europeană sau Marea amăgire North, R. (2006). Istoria secretă a construcţiei europene, Editura ANTET Pond, Elizabet (2003). Renaşterea Europei, Editura PANDORA-M René, Girault (coordonator) (2004). Identitate şi conştiinţă europeană în secolul

al XX-lea. Editura Curtea veche, Bucureşti Huntington, S.P. (2002). Ciocnirea civilizaţiilor şi refacerea ordinii mondiale, Editura

ANTET, Bucureşti


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CONCEPTUAL OPINIONS CONCERNING THE HUMAN FACTOR

Constantin ROŞCA

Ph. D. Professor Doina ROŞCA

Ph. D. Senior Lecturer University of Craiova

Abstract. The economic and social development is accompanied by a number of theories and conceptions that, explaining the role, importance and place of different factors, sustain, altogether, the changing processes from all domains of activity. So, there have been created conceptions concerning the human factor from the enterprise and these conceptions reflect the way of organisation and functioning of people in the social-economic context and have established a bond between classic and neoclassic production factors.

Any theory uses terms and concepts that reflect the essential, necessary and general characteristics of a certain class of objects. Likewise, in the theories concerning the human factor are used a series of terms: labour force, human resources, human capital, each of these having a specific meaning for one and only production factor, in different evolution stages of the enterprise.

This paper opens a discussion on the concepts "labour force" and "human resource" and sustains a change of actual conditions in which organisations of the third millennium function, giving up the first concept, in order to bring up the second.

Key words: human factor; labour force; human resources. REL Classification: 12C

1. Argument The economic and social development is followed by a multitude of conceptions that

not only govern but also support the process of permanent changing within all the activity domains. The economic activities, just like the human society in general, are in a process of changing, more or less accelerated, based on a series of theories on the role, importance and place of different development factors. Thus, there have been issued different conceptions on the human factor working in an enterprise; they reflect various ways of organization and functioning of the human groups within social and economic organizations and thus represent the basis of different ways of combining classic production factors (nature, work and capital) with neo-classic ones as well (technology, information, managerial capacity and so on).


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Any theory deals with concepts and terms expressing the fundamental logical frame that reflects the essential, necessary and general features of a certain class of objects as well as the general, basic and elementary principles belonging to the respective theory domain. Similarly, the theories on the human factor working in an enterprise use a series of terms and syntagma such as work force, human resources, human capital, each of them reflecting a certain content and having a certain significance given to the one and the same production factor during different stages of the enterprise evolution.

2. The human factor in the traditional conception of the enterprise 2.1. The origin of the concept "work force" The industrial organization of the ending of the 19th century and the beginning of the

20th century known under the name of the taylorist organization was based on the study of the working process during that period; the process was predominantly a manual one. Consequently, the studies on organization mainly focused on the rationalization of the workers’manoeuvres and movements while running different working procedures. Within such a context, during that period of time, appeared the concepts of work force, meaning the man’s physical force to handle machines and working devices, and of "workforce/working population", meaning the human instrument who turn the matter into products conform to the pre-establised working technology and methods.

The traditional conception of enterprise organization considers that the employee should develop his activity under certain conditions - planned, standardized and organized by the employer or by the specialized boards of the enterprise. Each employee ‘s development level soars to the maximum productivity level that they can reach under intense working conditions equivalent to that registered by the "excellent doer". The only thing the employer is interested in is the capability of his employees of making products conform to the standards established by the ruling board. That is why the employee is considered a malleabil production factor, dependent on his employer ‘s orders and rules, being motivated only by the financial means of the employer.

During that time the theorists of the classical school defined the concept of "work force" as "the total amount of a man‘s physical aptitudes used during the process of obtaining the products". Subsequently, following the introduction of the complex mechanized and automatized working process, the above-mentioned definition has been completed accordingly. Thus, it has been accepted that "the work force represents the total amount of physical and intellectual aptitudes existing in the organism and living personality of the man, as well as his own production experience, which he uses while producing certain values and products".

The new items introduced in defining the concept of "the work force" are the following:

- besides the physical aptitudes requested during the manual working process there appear the intellectual aptitudes which are more and more required within automatized working process;

- the man‘s living personality is the syntagm that reflects the thoretical influence of the human relationships school appeared in the 3rd- 6th decades of the 20th century.This theoretical trend considers that "the man-instrument" becomes "the human factor" whose personality is respected and who cooperates with the ruling board, being their partner in achieving the enterprise objectives;

- the man‘s production experience is another item introduced into the new definition, underlining the fact that the man becomes a highly influential factor on getting a higher productivity level in producing values of a certain type.


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2.2. Implications of the definition of "work force" concept So far the theoretical discussion has corresponded to the scientific trends of that

period of time. They synthesized an economic practice required by a certain development level of the social production. What we have to underline is the fact that during that period of time the totalitarian regimes of Marxist origin exploited to their own benefit some items from the definition of the "work force" concept, drawing them out from the context. Thus, the consequences interpretation focuses on the role of the proletariat and of the working class in organizing and ruling the society as well as on the justification (from this point of view) of a certain side of the "working class fight". Therefore, the interpretation of the phrase he produces, what? : values seen only as material ones, the work was divided into:

- "efficient work", run and made by who? : by "the creators of the material goods", by "the efficient staff" meaning "the workers, the working class, the society ruling class";

- "inefficient work" performed by "the inefficient staff ". Generally associated with those people who performed intellectual work, this inefficient staff was repudiated; it represented that category of people the regime merely used and the working class did not trust at all. Thus, they were all the time considered suspect and kept under observation. They were politically rejected, especially those who did not have their roots in the working class families.

The "efficient staff" rather than the "inefficient one" was trained to work more and better and to execute more operations during the same time unit, to produce more values, especially material ones.

Despite the fact that the concept "work force" is in the singular, it denominates an ensamble, a group of all those involved in the social work process. That is why the collective work, the group work was promoted, materially conditioning their results (the global agreement) but, at the same time, carefully observing those considered suspect to the regime interests.

"The man‘s living personality" did not meet the interests of the totalitarist regimes as it turned the man-instrument into the human factor and that is why it was not mentioned. The rulers are not at all interested in the individual, in his personality, needs, behaviour, specific opinions, hence all the characteristics of the human factor. Such an interest would mean an encouragement of the individualism, an attitude of those who were hostile to the "working society interests".

3. Human resources and their management – modern concepts on the human

factor Both organizational theory and practice of the last decades have used more and more

frequently the concept of "human resources" with its derived syntagm of "management of the human resources".

Some authors, without a deep analysis of the content, consider that there is a nowadays tendency to substitute the term "staff" with the expression "human resources", either following a simple whim or escaping a certain image of the former totalitarian epoch.

We totally disagree on their point of view and thus, we will try to clarify this aspect underlining the valences of the new concept.

Starting from the content of the term "resource" meaning a "reserve of means susceptible to revaluation at a certain moment" the human resources might be defined as "work reserves of the society that can be used in different activity fields and domains at the respective moment".

In this way, at the level of the society (the macro-economic level), the human resources are made up of:

- the working population;


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- the unemployed population; - the population over 18 still involved in the process of education. At the level of the organization (the micro-economic level) the human resources

consist of: - the employed staff; - the human resources for subsequent requirements of the organization, being

generally involved in the training process; - the proper staff who may be fired dismissed sooner or later; At the level of the organization, the concept of human resources – despite its usage in

the plural – refers to the individuals, to their personality characteristics and their unique and distinct character features.

Human resources are characterized by a series of specific features (as are mentioned in the specific literature) that confers to them the statute of strategic resource of any organization. Among these particularities, we underline the fact that human resources:

- represent one of the most important investments, with results that are more and more obvious in time;

- are unique in their growth and development potential, as well as their capacity of knowing and defeating their own limitations, to face new challenges and exigencies;

- contain a special human potential that must be known, understood, evaluated, cultivated, motivated and trained to implicate as deep as possible in realizing the objectives of the organization;

- are strongly influenced by the time-factor that is required for the processes of teaching, building experience, changing mentalities, habits, attitudes etc. that take up longer or shorter periods of time;

- are rare, valuable, insured and replaced with difficulty; - people are autonomous and free, capable of reacting unpredictably; - people have a certain inertia when it comes to change, compensated by a great

adaptability in various circumstances, varying greatly from individual to individual. Modern conception, that appeared and developed in the second half of the XX-th

century, promotes the idea that human resource management means continuing improvement in the activity of all employees, as to achieve the goals and objectives of the enterprise. This kind of management requires every manager to be a model of behavioral attitude that in turn supposes the existence of a performance evaluation system, employees’ stimulation system and results rewarding system.

Managers’actions take into consideration each employee as a distinct individual, with specific characteristics. Because of that, human resources management’s concept seeks the permanent cooperation of all employees to improve the products’/services’ quality, the quality of its functions and objectives as to insure the viability and long term profitability, in accord with requirements from and exigencies of the market.

4. The synthesis of the two conceptions A comparison of the elements that characterize the two conceptions on the human

factor from within an enterprise – the traditional theory and human resource management – underlines important differences of content that attract the attention of specialists – first of all – upon the modality in which they use the words "labor force" and respectively "human resources" and, not least, the modality in which the individual is perceived and appreciated in the organization.

This comparison is sketched in the next table:


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Characteristic elements of concepts regarding the human factor Table 1

The proper characteristics for: Elements of characterization the traditional theory of the enterprise concept of human resources

management 1. Notions used • labour force

• the employee • human resources

2. Discriminatory categories

• privileged categories: - productive work - physical work - creators of goods • undesired categories: - unproductive work - intellectual work - unproductive personnel

• there aren’t any discriminatory categories

3. Ways of approaching the personnel

• globally, as group of people • as simple expense, as element of costs that must be reduced and recovered as soon as possible

• as individuals with personality, needs, behaviour and specific visions; • investments for future development of the organization. As a result, human resources are the first strategic resources of the organization.

4. Fundamental ways of payment

• depending on the work (worked time) • depending on results (performances)

5. Evaluation of performances

• insignificant • formal

• essential

6. Challenging employee initiative

• nonexistent • the initiative of the employee was considered as an attack towards the superiors

• sustained and promoted by: - payment system (wages, bonuses, participation to benefits and so on) - promotion a.s.o.

5. Instead of conclusions Presently, in many Romanian enterprises, in media, but also in the universitary and

government related mediums (parliament, government), a traditional conception continues to manifest itself to treat the personnel as "labor force", these words being used at a large scale in oral conversations, universitary courses, laws, government bills, ministerial orders. Other notions have not disappeared either:

- physical work, with productive character, meant to be the single useful one in the society;

- intellectual work, pejoratively inefficient as it did no create material goods, being thus - to a certain extent - unuseful or less useful from the social point of view.

For example, we can mention the way in which intellectuals working in the educational field, research, health and so on are appreciated from the material point of view.

It is very clear from the scientific point of view that the concept "work force" is an obsolete one, which neither corresponds to the actual development level of the organizations nor to the democratic state organization. This thing should be highly understood and taken into account by the ones in charge with the destiny of our country.

The society of the future, which will be the informational one, the one of knowledge, requests each organization to be a real learning one to gain success.

Both the actual development level of the organizations and the future exigency require each employee permanently update his professional knowledge and train so that he can meet the spectacular scientific and technical progress of the third millennium.


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At the same time, escaping the past totalitarist tares imposes a radical change of the mentalities and of the way of thinking. In academic terms this means, first of all, a re-definition and a re-conception of the concepts, their substantiation into the new economic and social realities. It is very true that the changing of mentalities is a long-term process, as it should be followed by a systematic learning process and a professional running.

We consider that the overstep of the actual economic situation in Romania firstly depends on the alteration of the way of approaching the human factor working in the enterprises; this is essential in hanging the mentalities that root us into the past too much. That is why we appreciate that universities should have exclusivity or at least priority in forming and training specialists in the human resources domain (and not only) to meet European and international exigencies. We should avoid all sorts of improvisations used by different associations, foundations, commercial societies, even non-governmental organizations that, despite the fact they assume progressive staff training, are not competent to develop such scientific and didactic activities and are not capable of forming or/and changing mentalities.

At this point we cannot help remembering Silviu Brucan ‘s prophecies. 16 years ago he predicted that in Romania the mentalities would be changed within 20 years. With no intention to focus the pessimism of the situation we conclude by asking the following two questions: What has been done so far and how long is it until the Brucanian due term?

Bibliography

Goss, D. (1993). Principles of Human Resource Management, Routledge Series, U.K. Roşca, C-tin, Roşca, D. (2005). Resurse umane. Management. Strategii. Politici, Editura

Universitaria, Craiova Roşca, C-tin (coord.) (2004). Managementul resurselor umane, Editura Universitaria,

Craiova Roşca, Doina, "Consideraţii privind managementul resurselor umane în instituţiile

universitare", Teză de doctorat, Timişoara, 1998 Russu, C., Gheorghe, Ileana (2004). Managementul resurselor umane, Editura Tibuna

Economică, Bucureşti, Roşca, C-, Roşca, Doina (2005). Human Resources. Management. Strategies. Politics,

Editura Universitaria, Craiova Roşca, C-tin (coord.) (2004). Human resources management, Editura Universitaria, Craiova


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CONTRIBUTION OF STRUCTURAL ELEMENTS IN GDP FORMATION AND INCREASE

Ion ENEA-SMARANDACHE

Ph. D. Professor Andreea-Maria CIOBANU

Candidate Ph. D. Assistant University of Craiova

Abstract. Romania’s admission in the European Union implies a sustainable and continuous economic growth, in order to reduce economic and social disparities between our country, EU average and other EU members, through a mobilization of the intern capital and labour force potential. Given this context, the paper aims at identifying and explaining, through a retrospective analysis, GDP fluctuations and tries to evaluate, using the aggregate supply-demand model, the contribution of each structural element in GDP formation and increase. Finally, the article proposes directions of action for continuing the sustainable development of our country and reducing the gaps between Romania and other EU members.

Key words: nominal GDP; real GDP; aggregate demand; aggregate supply; growth

factors. REL Classification: 8D, 8E, 8L, 8M

1. Aggregate demand and the contribution of its elements in GDP growth Romania’s admission in the European Union implies a sustainable and continuous

economic growth, in order to reduce economic and social disparities between our country, EU average and other EU members, through a mobilization of the intern capital and labour force potential. Because the key elements in analysis of economic growth, of production, of inflation and of economic policies role are the aggregate supply and demand, we want to use the aggregate supply-demand model in order to explain and forecast the GDP fluctuations along this trend and also prices fluctuations.

At national economy level the aggregate demand is given by the quantity of goods and services solicited by households, companies, public power and the rest of the world and it is identical with the total expenditures made by internal and external users in order to acquire the final goods and services manufactured in the economy.

The aggregate demand will only depend on the quantity of goods and services which constitute the real GDP and the level of the prices.

It results that, following the evolution of the GDP which was calculated using the expenditures method, we will be able to determine the contribution of aggregate demand to


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the economic growth. In order to do that, we have to distinguish between the nominal and the real GDP.

The nominal GDP stands for the total value of the final goods and services which were manufactured by the economic entities from a country, in a certain period, expressed in the prices of the current period, respectively of the period in which it was produced.

The real GDP stands for the same value expressed in the prices of a certain base- year (reference year).

The real GDP will measure the modifications of the economic production between two different periods by evaluating the production of both periods in the same prices.

In order to pass from a nominal to a real GDP we need an indicator which should reflect the price evolution for all goods of the economy. Because such an indicator does not exist in practice, we can use the following:

a) Consumer price index (CPI); b) GDP deflator (DFl); c) Industrial production price index (IPPI); Between the consumer price index (CPI) and the GDP deflator (DFl) there are some

fundamental differences: the deflator includes a larger group of goods and services, larger than the one used

for the calculation of the CPI; CPI measures the evolution of the prices according to a fixed value for goods and

services which remains the same each year, and which does not occur in the case of the deflator;

CPI also includes the prices for the imported goods, while the deflator includes only the prices for the goods and services manufactured in the country;

According to these data the GDP deflator can be statistically expressed through the general price index (GPI).

Beside these indices in macroeconomic calculations we can also use volume index of GDP and harmonized consumer prices index.

In order to point our the contribution of the aggregate demand in GDP growth in Romania, it is necessary to follow up the evolution of its component elements (presented in table 1).

GDP evolution and the evolution of its components Table 1

- million lei comparative prices SC 95 (1998) - Indices 2000 2001 2002 2003 2004 2005 2006

Total GDP of which: 55746 84995 122748 159389 214270 256694 310084 • Internal demand, of which: 59652 92031 130778 173495 237969 290222 358417 Total final consumption 49144 73588 104318 137795 186443 230127 281518 Gross Capital Formation 10194 16733 26104 35046 46982 60645 77212 Changes in inventories 314 1710 356 654 4544 -550 -313 • Net external demand of which:

-3906 -7036 -8030 -14106 -23699 -33528 -48333

Export 18874 29605 45712 58175 78118 95376 104950 Import 22780 36641 53742 72281 101817 129264 153283

Source: National Institute of Statistics. Data analysis of the from table no.1 points out the following: The Gross Domestic Product registered a permanent growth between 2000-2006, and

this growth is also pointed out in figure 1.


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Figure 1. Variation of GDP growth (last year= 100) In real terms GDP registered between 2000-2006 a growth of 42.16% which means

an annual average rhythm of approx. 5.2%. It is significant the fact that Romania registered in 2006 (compared to 2005) the highest rhythm of GDP growth from the EU member states, as we can also notice in figure 2.

Figure 2. GDP growth in EU in 2006

The growth from the last seven years provided a gradual reduction of the disparities

towards the EU countries and allowed the reforms to continue in order to accomplish the general objectives of the Lisbon Strategy: “more economic growth and more occupation”.

The internal demand represented (in the entire period 2000-2006) the main factor for the GDP growth, and registered an average annual rhythm of growth of 8.2% which was superior to the GDP rhythm of growth (5.2%).

In our opinion the main factors which contributed to the growth of the internal demand were:

stimulating the private sector of the economy where the contribution in GDP creation grew from 65.6% in 2000 to 69.8% in 2006 (figure 3);

the absorption of the community funds; the stimulation of consumption credit through monetary policy measures; reducing the taxes on personal income and companies profit by introducing the flat

tax of 16% starting with 1 January 2005; foreign investments which stimulated gross capital formation.

7,7

2,9 3,1 3,1

4,4

2,7 2,71,9

7,5

2,9

3,94,4

3,93,2

0

1

2

3

4

5

6

7

8

9

Roman

ia

EU 25

Austri

a

Belgium

Denm

ark

Finnlan

d

United

King

dom

Ger

man

yIta

ly

Lithu

ania

The N

ethe

rland

s

Spain

Sweden

Hunga

ry

102,1

108,5

104,1

107,7

105,2105,1105,7

90

95

100

105

110

2000 2001 2002 2003 2004 2005 2006

%


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Figure 3. Contribution of private sector in GDP creation

In the analysed period, the main factor of economic growth remained the individual

consumption of the households which registered an annual average rhythm of growth of 7.2%, its contribution in real growth of the GDP oscillating between 40.7% and 73.5% (table 2).

Contribution of demand components in GDP dynamic Table 2

- Percentage modification towards the previous year - Constitutive elements 2000 2001 2002 2003 2004 2005 2006

Real GDP 2.1 5.7 5.1 5.2 8.4 4.1 7.7 Final consumption 1.4 6.1 3.0 8.3 11.9 8.5 8.8 Households actual individual final consumption 0.2 6.8 4.8 8.3 12.9 9.0 9.4 Government’s actual collective final consumption

20.4 -1.9 6.1 8.5 4.6 4.9 4.00

Gross fixed capital formation 5.5 10.2 8.2 8.6 10.6 13.0 12.6 Changes in inventories 1.0 -0.5 0.7 1.2 -0.3 -0.2 +0.5 Net export (export – import) -5.6 -7.8 -5.8 -7.6 -8.2 -9.6 -4.9 Contributions to real GDP growth: Internal demand

5.9 9.8 9.3 8.8 13.0 8.7 14.1

Households actual individual final consumption 2.4 7.2 4.5 6.4 9.7 7.1 9.9 Government’s actual collective final consumption

0.7 -0.3 1.5 0.6 0.5 1.0 0.2

Gross fixed capital formation 2.9 3.0 3.1 1.8 2.3 2.8 3.7 Changes in inventories -0.1 -0.1 0.2 0.1 0.5 -2.2 0.3 Net external demand (net export) -3.8 -4.1 -4.2 -3.7 -4.6 -4.5 -6.4

At the same time the final consumption grew in an annual average rhythm of 6.8%

and the final governmental consumption with 6.5%. An extremely important element, with significant contributions especially for the

future which contributed in GDP growth, was the improvement of investment-consumption ratio. So, gross capital formation grew in an annual average rhythm of 9.8% in the analysed period, which in the given circumstances and taking into account the European and worldwide realities, will constitute the engine for the durable and sustainable economic growth in Romania in the future years.

The emphasized growth of investments in 2000-2006 period led to the increase of their contribution in the growth of the internal demand and real GDP.

Reducing the direct tax on labour and capital stimulated savings and investments, the process being also reflected in the growth of investments in the private sector and of foreign investments, as data from table no. 3 show.

65,7

68

69,4

67,7

69,9 69,8

71,4

6263646566676869707172

2000 2001 2002 2003 2004 2005 2006


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Evolution of foreign direct investments Table no. 3

Indices 2000 2001 2002 2003 2004 2005 2006 Investment rate (% from GDP) 18.9 20.7 21.3 21.4 21.6 23.1 23.6 Investments (mill. euro) 1147 1294 1212 1946 5183 5208 7500

Source: NIS. Net export registered a negative contribution in GDP growth, as a consequence of

increased imports of goods and services, mainly caused by the high dependence of the Romanian economy, of energy imports and raw materials imports and secondly by the capital goods imports (figure 4). Investments in economy led to a growth in competitiveness of Romanian products, fact which was reflected in the change in structure of the industrial products export in the sense that the export of resources and products with a low incorporated added value (low technology) was reduced, and the export of products with high incorporated added value increased (medium and high technology products).

Figure 4. Evolution of Romanian and EU 27 exports and imports between 2001-2006

Because Romania mostly relies on imported technology, sustained efforts are necessary in order to create it also at a local level. As a consequence, it is expected that net export will continue to have a negative contribution to the GDP growth, but on a descending scale. The faster growth of imports compared to exports led to the growth of commercial deficit, which was also reflected in the growth of the current account deficit (table 4).

Romanian trade balance in the period 2000-2006 Table 4

- million euros - Indices 2000 2001 2002 2003 2004 2005 2006

Exports of goods and services(FOB) 11273 12722 14675 15614 18935 22255 26100 Growth towards the previous year % 41.3 12.9 15.4 6.4 21.3 17.5 17.3 Imports of goods and services (CIF) 14245 17383 18881 21201 26281 32569 39370 Growth towards the previous year % 43.4 22.1 8.6 12.3 24.0 23.9 20.9 Imports of goods and services (FOB) 13140 16045 17427 19569 24258 30061 36340 Growth towards the previous year 43.7 22.1 8.6 12.3 24.0 23.9 20.9 Trade balance (FOB – CIF) -1867 -3323 -2752 -3955 -5323 -7806 -10240 Percentage from GDP % -4.6 -7.4 -5.7 -7.5 -8.8 -9.8 -10.8 Trade balance (FOB – CIF) -2962 -4661 -4206 -5587 -7346 -10314 -13270 Percentage from GDP % -7.4 -10.4 -8.7 -10.6 -12.1 -13.0 -14.0

Source: NIS data and own calculations.

99,5 98,7 103,7 111,4116,2 122,7

253,6

212,5184,8

153,1132,2

119,4

102,7

131,4124116,1105,8104,3

184,6169,1

153,9

134,3110 125,9

0

50

100

150

200

250

300

2001 2002 2003 2004 2005 2006

EU27 average imports Romania importsEU27 average exports Romania exports

2000=100


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Among the factors which have influenced Romanian imports, which in the analysed period registered an annual average rhythm of growth of 14.22% (towards 2.96% EU27 average) we mention:

the unfavourable evolution of the petrol price (the growth with more than 100% in the last 4 years); because the demand of energy products is inelastic in any country the value of the energy imports grew in Romania with over 50%;

the growth of foreign direct investments which in the first years generate massive capital imports from investors origin countries;

the absorption of structural and pre-accession funds which meant in most of the cases, imports of equipments for infrastructure investments and of fixed capital and of re-technologisation (projects financed in international cooperation where the financial partners were the preferred suppliers);

the growth of internal prices which was faster compared to international price growth, on the background of the labour force price growth because of the strong appreciation of the national currency (leu) which was the currency with the highest nominal appreciation from the international market;

From the factors which influenced the Romanian exports, which have increased with 9.15% yearly (compared to EU 27 average of 3.98%), we have to mention:

the volume growth of foreign investments which through the know-how transfer and through the interests of foreign investors that developed businesses in Romania, lead to the increase of exports especially in the branches of the manufacturing industry where most of the investments are concentrated;

the strong appreciation of the leu (especially in the last years) led to the diminution with 20-25% of price competitiveness fact that caused the reduction of exports especially in the branches where the elasticity of demand-price ratio is high (the international demand is price sensitive);

wage growth exceeded productivity growth in many branches. This thing led to reduction in price competitiveness as a consequence of cost growth at internal producers;

the unfavourable evolution of the demand on international market. As a conclusion we can say that in the analysed period the main factor of Romanian

economic growth remained households individual consumption (the main element of the internal demand). But this has reduced its contribution to real GDP growth at the same time with the increase contribution in gross fixed capital formation.

It is also significant the fact that while the growth in gross fixed capital formation was important, households individual consumption was situated on a descendent trend, this fact being also shown by GDP evolution on expenditure elements (table 5).

GDP evolution on expenditure in the period 2000-2006 Table 5

% Indices 2000 2001 2002 2003 2004 2005 2006

Total GDP 100 100 100 100 100 100 100 • Internal demand, of which: 107.0 108.28 106.54 108.85 111.06 113.33 115.50 Total final consumption 88.16 86.58 84.99 86.45 87.01 89.65 90.76 Gross capital formation 18.22 19.69 21.27 21.99 21.93 23.63 24.90 Changes in inventories 0.56 2.01 0.28 0.41 2.12 -0.22 -0.08 • Net external demand, of which -7.00 -8.28 -6.54 -8.85 -11.06 -13.33 -15.59 Exports 33.86 34.83 37.24 36.50 36.46 37.30 33.85 Imports -40.86 -43.11 -43.78 -45.35 -47.24 -50.36 -49.43

Source: calculated on data basis from table 1.


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The data from the table no.5 also show the fact that the internal investment rate grew in the analysed period from 18.28% to 24.9%. In the same period the internal savings rate grew from 11.84% in 2000 to 15,01% in 2002 and afterwards it registered continuous reduction up to 9.21% in 2006 (figure 5).

Figure 5. Evolution of internal investment rate and saving rate in Romania 2. Aggregate supply and the contribution of its elements in GDP growth For the study of the contribution of the aggregate supply in GDP growth we will use

the data related to GDP, which were already presented in table 6.

GDP evolution on categories of resource in the period 2000-2006 Table 6

- million RON current prices - Indices 2001 2001 2002 2003 2004 2005 2006

GDP 80377.3 116768.7 151475.1 197564.8 246468.8 288047.8 342418 Added gross value 71132.5 104283.7 135619.2 175401.8 219975.9 254388.8 303285 Taxes on product 8806.3 12185.8 15769.5 22072.0 26278.2 33715.5 39191 Rights on imports 905.2 903.8 936.1 1329.7 1632.5 2033.4 2722 Subsidies on product -466.7 -604.6 -849.7 -1238.7 -1417.8 -2089.9 -2779

Source: Romanian Statistical Yearbook, NIS, 2006.

Data from table 6 show that fact that the main GDP component is the gross added value which registered an annual average rhythm of growth of 5% (but inferior to the rhythm of growth of the real GDP). The most significant growths are to be seen in 2000 (+5.9% towards 1999), 2004 (+6.5% towards 2003) and 2006 (+6.4% towards 2005).

GDP evolution on branches of activities in the period 2000-2006

Table 7 - percentage modifications from last year -

Indices 2000 2001 2002 2003 2004 2005 2006 GDP 2.1 5.7 5.1 5.2 8.4 4.1 7.7 Industry 5.9 4.4 5.1 4.4 6.5 2.5 6.4 Agriculture -18.1 28.0 -6.6 5.2 18.9 -13.9 1.5 Constructions 6.3 11.1 7.6 7.0 9.1 9.9 13.0 Services 5.5 3.6 7.1 5.5 6.8 8.1 6.5

Source: NIS.

9,2110,35

12,9813,5415,0113,42

11,84

24,923,6221,9221,9821,2719,6918,28

0

5

10

15

20

25

30

2000 2001 2002 2003 2004 2005 2006

saving rate investment rate


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The GDP structure on branches of activities in the period 2000-2006 Table 8

Indices 2000 2001 2002 2003 2004 2005 2006 Industry 27.3 27.7 28.1 25.0 25.2 24.4 24.0 Agriculture, sylviculture, pomiculture, forest exploitation

11.1 13.4 11.4 11.6 12.8 8.9 8.0

Constructions 4.9 5.3 5.8 5.8 6.0 6.5 6.9 Total services 41.4 40.3 40.5 46.4 45.2 48.3 49.1 Total economy 84.7 87.1 85.8 88.80 89.10 88.1 88.0 Net taxes on product 15.3 12.9 14.2 11.20 10.9 11.9 12.0 GDP 100 100 100 100 100 100 100

Source: NIS. Following the GDP evolution on branches of activity (table 7) we see that the

acceleration of its rhythm of growth (+5.2% per year for the period 2000-2006) was accompanied by some positive results consisting of adapting the supply to the exigency of the demand.

We can also notices the fact that there was no year in which gross added value from the industry exceeded GDP growth, although the annual average rhythm of growth was with 4.2% higher than the one registered in agriculture 2.2%.

In the last years of this period (2005 and 2006) we witnessed an accentuation of the ascendant trend of the gross added value in industry, its rhythm of growth being supported by all three sub-sectors: extractive, manufacturing and energetic.

The most representative evolutions were registered in: the food industry which in the last years benefited from the consistent contribution

of the foreign investors drawn by the market potential but also by the important funds granted through different programmes (SAPARD);

metallurgy as a consequence of internal demand growth of the industrial and construction operators;

electric machines and devices; transport vehicles.

The last two branches increased their rhythm of growth especially because of the deliveries in export.

The gross added value from agriculture knew some ups and downs related to the climate conditions especially in the vegetal production which in 2006 knew a significant growth compared to 2005, growth which did not compensate the negative rhythm of the zootechnical component.

The most sustainable growth was registered in constructions sector which registered an annual average rhythm of growth of 9.1%. A major contribution in this sector was represented by engineering constructions and residential buildings, which was also a consequence of the growth of foreign investments (gross fixed capital formation).

The dynamic and the share of the services registered an ascending evolution, the annual average rhythm of growth in this sector (6.1%) being the highest one.

The progresses registered in all activities sectors led to significant mutations in the GDP structure (table 8)

In spite of all these deficiencies industry had in the period 2000-2006, there were some significant contributions in the growth of real GDP (table 7 and figure 6).


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Figure 6. The evolution of the contribution of the main components to the growth of the real GDP in Romania, in the period 2000-2006

Analysing the contribution of the branches to GDP real growth (figure 6) we see that the most significant growth was registered in services sector which had the greatest contribution in real GDP growth (3.1% in 2004 and 3.6% from the real GDP growth took place in this sector in 2005 and 2006).

Mainly the growth from services sector was related to the activities from retail trade, transports, telecommunications, real estate transactions and services for those enterprises which registered annual rhythms of the turnover which were superior to the sector average.

3. Attenuation of the disparities compared to EU The positive evolutions registered in the Romanian economy in the analysed period

led to the attenuation of the GDP disparities per inhabitant as compared to the EU27 average (table 9 and figure 7).

Evolution of GDP per inhabitant at standard purchasing power Table 9

Country 2000 2001 2002 2003 2004 2005 2006 2007* 2008* EU (27 countries) 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Euro Zone 115.6 113.8 112.9 112.1 111.1 111.0 110.2 109.9 109.4 Austria 133.7 127.6 127.9 129.0 128.8 128.6 128.7 129.3 128.7 Belgium 126.4 124.0 125.6 123.5 124.5 124.4 123.3 123.4 122.6 Bulgaria 27.9 29.4 31.1 32.6 33.6 35.2 37.1 38.7 40.3 Denmark 132.2 128.4 129.0 124.7 124.5 126.3 126.6 126.6 125.5 Finland 117.8 116.2 115.7 113.5 115.9 114.5 116.3 117.3 117.3 Germany 119.0 117.1 115.7 117.1 116.1 114.6 113.6 114.2 114.1 Italy 117.4 118.3 112.4 111.2 107.6 105.4 103.7 103.3 102.2 Lithuania 39.4 41.6 44.2 49.2 51.1 53.8 57.7 60.9 63.1 The Netherlands 134.8 134.3 134.0 129.9 130.3 131.9 132.1 133.0 132.8 United Kingdom 117.4 118.1 118.9 120.0 121.8 119.6 119.1 119.4 118.7 Spain 97.8 98.5 100.9 101.4 100.9 102.5 102.4 103.1 103.2 Sweden 125.4 120.0 119.2 120.5 120.4 119.1 120.3 121.8 122.3 Hungary 56.3 59.1 61.7 63.6 63.9 64.8 65.3 65.7 65.8 Romania 26.0 27.6 29.4 31.5 33.6 34.4 37.6 39.5 41.1 United States 159.5 155.4 151.8 152.4 153.5 155.3 154.5 151.0 149.7 Japan 117.4 114.7 112.3 112.4 113.2 114.2 113.7 113.0 112.5

Source: Eurostat. *) - predictions

2,8

-0,50,6

2,2

0,31,5

2,1

2,1 1,2

1,6

0,61,7

0,3

0,3

0,3 0,4

0,5

0,6

1,22,6

0,4

2,5 2,5

3,1

3,6

3,60,1

0,5

1

1

0,9

-1,7-2,4

0,70,1

-4

-2

0

2

4

6

8

10

2000 2001 2002 2003 2004 2005 2006

Agriculture Industry Constructions Services Taxes

real GDP (%)

7,78,4

5,25,15,7

4,12,1


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Figure. 7 Evolution of GDP per inhabitant at purchasing power standard in Romania compared to EU-27

Data from table no.10 show the following: in the analysed period 2000-2006, although the GDP per inhabitant at purchase power

standard (PPS) diminished as compared to the EU-27 average in some countries as Belgium, Denmark, Germany, Italy, Sweden, it still continues to be over this average. In other states there were some slight oscillations (Austria, The Netherlands, Finland, United Kingdom) while in the countries from the old communist block (Bulgaria, Latvia, Hungary and Romania) there was some significant growth which were able to recover 9% (Hungary) and 18.3% (Lithuania) from the EU-27 average.

although our country has recovered 11.6% it continues to be on the last but one place from the EU countries with a GDP per inhabitant at PPS which represented in 2006 37.6% from the average. The GDP growth per inhabitant in our country was the consequence of the total GDP growth but also of the population reduction.

the growth of the real GDP in the EU-27 countries registered an average annual rhythm of growth of 1.685 between 2000-2006 as compared to 5.8% in our country. The highest rhythms of real GDP growth were registered in the Baltic countries (Latvia 7.49%, Estonia 7.46% and Lithuania 6.63%) followed by Romania (5.2%), the Czech Republic and Bulgaria (4.62%), Slovakia (4.43%) and Slovenia (4.29%), all former countries from the communist bloc with a special growth potential.

the recovery of the disparities towards the EU average will be quite difficult because in the mentioned countries, the labour productivity per person is situated under the EU-27 average being in 2006 of 33.5% in Bulgaria, 71.2% in the Czech Republic, 63.7% in Estonia, 52.9% in Latvia, 58.6% in Lithuania, 38.35 in Romania, 84.7% in Slovenia and 70.4 % in Slovakia.

Romania’s integration in the EU structures increased the chances and the opportunities of taking advantage of being a fully member and underlined the need to amplify the own effort in order to modernize the economy and to reduce the disparities that separate us from other member states.

Bibliography

Anghelache ,C-tin. (2005). Romania 2005 – How many changes, Economic Publishing House, Bucharest Capanu, I. (1998). Macroeconomic indices. Content and their functions, Economic Publishing House, Bucharest Ciurlău C. (coord.), Enea-Smarandache I., Murăriţa I., Ciurlău, C.Fl., Ciobanu, A.M. (2006). „Economic

Forecast”, Universitaria Publishing House, Craiova Enea-Smarandache, I. (1996). Optimisation for the growth of the production, Sitech Publishing House, Craiova, Genereux, J. (2000). „ Macroeconomics in the open-economy”, ALL Beck Publishing House, Bucharest ***, „The Guide of the Economic Indices”, Teora Publishing House, Bucharest, 2001 ***, „Report on inflation”, Romanian National Bank, August 2007 ***, „System of prediction analysis for the implementation of the macroeconomic strategies and

programmes”, Economic studies and researches, no. 5/1995

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2000 2001 2002 2003 2004 2005 2006 2007* 2008*

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41.139.537.634.433.631.529.427.626

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THE CONNECTION BETWEEN INTERNATIONAL EXCHANGES AND ECONOMIC DEVELOPMENT

Ion BUCUR

Ph. D. Senior Lecturer University “Petrol-Gaze”, Ploieşti

Abstract. International economic exchange have a positive influence over the

economic development. The countries witch contribute actively to world economic market have greater abilities to include tehnological generated by developed nations.

Key words: import; export; commercial deficit; economic politics; economic gaps. REL Classification: 3B

There are several points of view over the influence of foreign trade in economic

development. According to some opinions, the trade is a mechanism through witch the richest nations exploit poor countries. Other opinions sustain that, although the trade doesn’t have a negative influence, its impact is too small for generating a powerful stimulant for development. In these situations it’s best to orientate the savings in internal development strategies. Also are opinions that say that the opening of trade is the only feasible development strategy on long term.

The controverces in the effects of trade say that free commerce este a cause of underdevelopment due to dependence of poor countries to the developed ones. In present days the human kind registers a period of unprecedented liberalization. Although many studies show the positive implication of internacional trades over the economic development the controverces still exists. A cause could be the fact that economic literature regarding this subject has issues with the statisc datas.

The critics regarding positive effect of international trade could be grouped: - the doctrine of comparative advantage is wrong and international trading is an

unequal trade; - the exports of countries in development fail in sustaining economic development

due to a weak multiplicator effect of trade - the export prospects of undeveloped countries, are small and the price of this exports

has reduced in compare with exports of developed coutries. On medium and long term, the specialists consider that the opening of economies to

external trade has favourable effects. All countries, no matter the level of development, have benefits from participating to external trades. The benefits are the effects induced in inside economies. These benefits are different nature and generate important redistributive effects in each contry.

The imports have an important role in economic development. The important functions are:


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- allow obtaining economic goods and production factors witch some countries don’t have, or could be produced with greater effort;

- stimulate development of productions activities through assimilation of ethnic and scientific discoveries;

- stimulate the competition in the production and sales activities in national economies;

The imports are a source of opportunity gain witch assure an alternative use of resources. The eschange is favourable when the opportunity gains of imports are greater than opportunity cost of correspondent exports. For the imports to have a major role in production process, it must allow the introduction of new tehnologies witch aren’t available or are hard to obtain locally. Under these circumstances the imports stimulate the growth of production capacity, the growth of global productivity of production factors, develop the tehnologic capacity of the importer country through international knowledge diffusion.

Obtaining of positive effects from imports is conditionated by the capacity of importers to integrate and efficiently use the imported equipments.

For reducing the of foreign dependency some countries adopted politics of substituting of imports. These politics are known as being ones of economic development politics based on external trading. Applying these policies necessitate using some tarifary instruments as high custom taxes on finit products and no taxes on imports, for consume and production motives. The politic of substituting imports determines the growth production of equipments and consume goods withoud diminuate foreign dependence. Producing these goods could be more expensive than importing them, witch could generate lack of economic balance and social tensions. The strategy of substituting the imports could not asure economic and social progress.

The export is an important factor of economic growth. The export generates income. The countries are interested in expanding the exports concentrating investments in the sectors in with they have an advantage, witch determines growth productivity of factors.

The expansion of exports is correlated with the performance of economic activity and implies existence of resources for investment in human and fizical capital and in advanced production tehnologies. The growth of export stimulate economic growth, determining expanding the rate of capital forming, improving capital and externality. The pression of mondial competition, diminuate in many cases the inefficiency of exports and help adopting efficient tehnilogies favoring the innovation process. From specialization are obtained the advantages of scale economies.

International economic exchanges stimulate the economic growth because its extend the consume capabilities of participant countries and facilitates obtaining the economic goods necessary for covering consume and production needs. By promoting the economic domains in with countries had comparative advantages, the economic international exchanges favourise economic and social development al world states. The quantities tranzactionated in economic trades by a country in condition of free commerce, are established by the level of international prices and production costs. Each country is interested to trade the volume of goods witch assure the maximization of national welfare. So the development of economy necessitate a commercial politic oriented external.

The competitivity of a country is reflected by its capacity to complete some internal objectives without excessive degradation of paymanet balance.

The commercial balance is the most important component of the payment balance, witch is a statistic sintezis of economic and financial relations of a countru with foreign countries and witch reflect the modifications these relations produce on valutary market. Generally, a passive payment balance reflect the poor situation of that country. The passive


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sold could be balanced, principally, by merchandise export, valute export and foreign credits. These operation categories have several influences over the exchange course.

The main role of trade balance is on the currency market; if the balance is passive because of expansion of imports over exports, like in our country, the incomes decrease and the possibilities for import and external duty payment decrease too. If the balance is active, the incomes of country increases.

In Romania, between 1990-2000 the trade balance was negative and the deficite was 20 mld. US dollars. This deficite balance has increased in the first five years of XXI century with another 35 mld. dollars, and in the year 2006 it was about -14,9 mld. euro. In 2006 this negative balance was 5 times greater than the one in year 2000, and the rate of import covered by export has dropped from 79.5% in year 2000 to 63.4% in year 2006.

EU aderation of Romania from 1 january 2007 has brought important changes in commercial polictic of our country. Romania has removed the last taxes in commerce exchange with member states of EU. It thake part to the comunitary market with gathers 500 million consumers. Our country has addopted all the rules of imports from other EU members. In the same time all the competencies in making politics for foreign commercial exchange were transferred to EU. In exports domain not all the rules of EU were adopted. An example is the domain promoting and stimulating exports. The rules for export credits were adopted and rules for export of agricol products. The government of member states follows the rules established by Commerce World Organization.

For our contry to extend the economical international exchanges with consequinces more favorable, is must improve the competitivity of productive sector, witch implies the existence of firms liable to investment. Through investments more production capacities are produced, the existing ones extend, the old tehnologies are replaced, and more quantities of economic goods could be exported.

The fundamental objective of our country post aderation, the convergence with EU states, will alow greater benefits from export expansion.

The actual state of development of Romania from post aderation perspectives could be extracted from indicators like GDP per inhabitant and export per inhabitant.

The GDP per inhabitant sums the result of added values from all activity domains, including the balance of relation with foreign reported to the number of population. There are frequently utilized in international comparations.

In 2005 Romania has reached the level of 8200$ GDP per inhabitant, witch is less than a third of EU-25 media, 26,900$.

The development gaps revealed by this indicator remain insignificantly in compare with advanced EU states (1/8 in compare with Luxemburg, 1/5 in compare with Ireland, 1/4 with Austria, Denmark and Holland, 1/3 with Germany and France), and also in compare with EU members from Central and East Europe (1/2.5 in compare with Slovenia and Cechia, 1/2 with Hungary, 1/1.5 with Poland and baltic countries).

Reducing the gaps of Romania from this point of view, and also regional discrepancies, depends on accelerating the economic growth, and by increasing the gross capital formation sustained by internal economy and EU transfers.

By maintaining an anual rithm of 6-7%, on long term, Romania could equal the European medium GDP per inhabitant in 2 to 3 decades (in a ipotesis that EU annual rate of economic growth would not be greater than 2-3%).

The export per inhabitant is another indicator essential for economic growth. It reflects the capacity of a country to impose on world market and also represents a measure of the level of competitivity an performance of economy.


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In the last decades is observed a tendency of growth of exports in GDP (on global level fom 10% in 1950 to 20% in 1980 and over 40% in 2000). This tendency reflects the dependence of economical development to participating to world goods exchange.

In a ranking of states in function of export per inhabitant, in the first places are small states, Singapore with cca 45600 $/inhabitant, Luxemburg with cca 28200 $/inhabitant, Belgium with cca 26000 $/inhabitant. The world’s largest exporter Germany, with a volume of exports of over 1000mld. $, is in the 12 place with 12300 $/inhabitant. The second largest world exporter, USA with a volume of export of over 930 mld. $, is in the 31 position with cca 3100 $/inhabitant.

Romaina with an export per inhabitant of 1250 $/inhabitant is in the 42 place, below Bulgaria.

In the last decades, the gap registered by Romania at this indicator has increased, thing that reveals a lower speed of our economy in integration to world economy, in compare to other states. If in 1984, the export of 600$/inhabitant was 1.5 times greater than the world medium that time, in 2005 it represented 80% of medium (1600$/inhabitant in 2005). In compare to EU medium the gap increased from 1/6 to 1/7, in condition in wich the medium (8500$/inhabitant) of EU lowered because of aderation of states with low level of this indicator.

Romania has notable gaps in compare with states from Central and East Europe, 1/6 in compare with Cechia, 1/5 in compare with Hungary and 1/2 in compare with Poland. The Romanian gap in compare with EU countries has expandend from 1100$/inhabitant in compare with Frace and 700$/inhabitant in Italy in 1984 to over 6000$/inhabitant in France, 5000$/inhabitant in Italy in year 2005.

Data interpretation in international commercial exchange must consider the accelerated expansion of commerce with intermediar goods (delocalization of production in other countries, combined with transfers over the countries of these goods). The doubled registers wich are produced in thie situation expand artificially the value of imports and exports.

In Romania, the procent of these operations is very hight, but there is a tandency of decrease in the last years. In 2005, the exports of this kind represented almost half of exports. In this situation the real data of income from export per inhabitant is 600$ witch situate Romania to a lower place in mondial herarchy.

In Romania, in case of active perfection operatins the principal domains are clothing and shoes processing (in lohn sistem) and more recent auto parts.

In many countries, including the ones placed in first places, in the domain of active perfectioning, have a bigger percent the operations with electronic components.

The percent of exports of high tehnology in some countries

Tabel 1 Country Percent Irlanda 48 Olanda 35 Regatul Unit 32 Finlanda 27 Ungaria 26 Suedia 22 Danemarca 21 Germania 18 Austria 14 România 6


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For Romania reducing the gap in export per inhabitant necessitate acceleration of exports. These include measures like:

- investments for modernize productive equipment - intensify attraction of foreign investements - appling a strategy for promoting Romanian exports, sustained through financial-

banking means According to official prognosis, in the next 5 years, the Romanian export would grow

in a annual mediul procent of 15%, witch would double the volume in 2010, including the level of exports per inhabitant.

The export of a country is influenced by internal and external factors. Among internal specific factors are:

- commercial and export promovation politics - supply resources - economical stocks configuration - the dimension of internal market - commercial politics for promoting exports From external factors a special importance has the evolution of exchange rates, world

market, and especially price fluctuations, conflictual situations from some parts of the world. The evolution of import and export are influenced by the elasticity of these in

function of price. As a rule, import of alimentary products of a contry that doesn’t have these products are rigid, not sensitive to price modification (the import decrease with less than a procent when the price rise one procent.) Another product with rigid elasticity to import is oil. The rise of price is a factor wich unbalance the commercial balance, because could not be replaced even at a high price.

For stimulating the export, in Romania was elaborated a National Strategy for export between 2007-2009.

In the context of passive cronic bakance, in our country was introduced starting with 2002 a system for sustaining and promoting the export, in with the funds alocated from state budget are approved distinct in annual budgets of ministeries and national agencies (finance, commerce, industry, agriculture, IMM’s). Also for improving the institutional frame, was created the Export Council, organized on a public-private pertnership.

The instruments of sustaining and promoting of export with budget finance are administrated by Eximbank and resort ministeries.

For encouraging exports, on resort ministeries were elaborated programs like: program for promoting exports, administrated by Economy and commerce Ministry

witch contains partial and total budgetary payments regarding: - realizing on concurential basis of informative bulletines (100% support) - duty of

Romanian Commerce Promoting Center. - Realising of promoting actions (100% support) - duty of Romanian Commerce

Promoting Center also. - Participating to international expositons and fairs (50% support) - Organizing commercial Romanian representatives (50% support) - Elaboratind market prospects (50% support) - program for supporting IMM’s in developing export, administrated by National

Agency for Export - program for expanding competitivity of industrial products, administrated by

Commerce and Economy Ministry. Very important for encouraging exports are the next actions: - improvement of quality and promovation of products and packaging correlated with

attractive prices


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- stimulating development production activity by assimilating world new scientific tehnologies

- stimulate production of competitive on external market products - expanding and growing competitivity of export offert - expanding measures and activities for promoting in foreign countries delivers of

economic goods on external markets, including the use of internet. A special attention must be accorded to encourage Romanian export to

RussinaFederation, China, India, Turkey, South East Asia and Middle Orient. Sustaining and promoting Romanian export implies intensifying scientific research

regarding the means to realize these important objectives.

Bibliography

„Encourage export” în Economistul, No. 2361 (3387) 25 april 2007 “The actual stage of Romania’s economical development from the perspectives of the post-

adhering”, Economistul, No. 2354 (3210), 17 april 2007 Antonescu D., “Romania’s regional development – concept, mechanismes, institutions” ,

Oscar Print, Bucharest, 2003 Balassa B. “Exports and Economic Growth”, Journal of Development Economics, 5, 1978 Cotigaru, Beniamin, Purcărea Teodor “The durable development; principles and actions”,

Ed. Millenium, Bucharest,2 000 Domiquez L., “Economic growth and import requirements”, Journal of Development

Studies, 6, 1970 Emery R. “The relation of export and economic growth”, Kyklos 20, No 2,1967 Feder G. “On exports and Economic growth” Journal of Development Economics, 12, 1983 Ghiţă P.T. ”The Convergence. Expectings and observable realities”, in C. Angelescu (ed.)

“Economical Convergences in the European Union”, Ed. Economică, 2002 Grossman G. “Inovation and growth in the global economy”, Cambridge Mass. MIT Press, 1991 Kavaussi RM. “International Trade and Economic Development Countries”, Journal of

Development Affairs, No.19, p379-392 Monica Ioana Pop Silaghi “Controverses regarding the relationship between the

international commerce and the economic growth”, Young Economist, No 3, 2004 Tyler W. “Growth and export expansion in Developing Countries” Journal of Development

Economics, 9, 1981


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THE SCIENTIFIC RESEARCH AND THE ECONOMIC PROGRESS

Elena CIUCUR Ph. D. Professor

Dumitru CIUCUR Ph. D. Professor

Abstract. In the past decades, the concerns regarding the involvement of scientific

research in the economic life at all levels of aggregation and in the organizational structures system have considerably increased. The area of the economic research, that we wish to deal with, includes multiple forms, that start from the academic forms characteristic to the fundamental research and go on to development and innovation forms, and, then, to applicative forms, getting to the area, where the governmental policy is formed. Here the macro-economical decisions are harmonized with the country’s big economical interests on an elevated and especially effective scientific foundation. These are reflected in the economic progress, namely in the evolution tendency of the national economical system, having as essence the improvement of the global performances, materialized in high economic levels and in a superior quality of the life of population.

Key words: economical research; economical progres; neofactors. REL Classification: 5B

1. The content of the economic scientific research In the present, the scientific research connects to the tensions of change, being an

expression of economical evolution rational perception of those who are gifted with creativity, inventiveness and an innovative spirit, and have, at the same time, the motivation to get involved in this sense. The characters of the scientific research think of their own interests, in correlation with the public agenda inherited from a revolution that, like all revolutions in history, involves a complex of profound qualitative changes from an entire system or from its’ components, lasting for a second and leaving behind a century.

Understanding the content and the scientific research functions implies capturing the crucial characteristics of economy, as organic part of the entire science and its coherence, characteristics that determine the essence of the scientific research.

We point out in this context that the science represents a crucial and extremely dynamic sector of the economic system in currently developed countries. The following data referring to the share of expenses for research-development (RD) in GDP and the RD expenses per inhabitant are conclusive evidence.


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The weight of RD in the GDP and the RD expenses per inhabitant in 2005 Current

No. Country % in the

GDP

RD expenses per inhabitant

(USD) Current

No. Country % in the

GDP

RD expenses per inhabitant

(USD) 1 Australia 1.26 464 15 Mexico 0.39 303 2 Austria 2.20 672 16 Holland 1.80 539 3 Belgium 2.31 683 17 Poland 0.56 64 4 Canada 1.94 592 18 Portugal 0.94 176 5 Czech Republic 1.26 218 19 Romania 0.37* 7** 6 Korea 2.64 509 20 Spain 1.10 270 7 Denmark 2.53 760 21 Sweden 3.98 1.150 8 Switzerland 2.57 1.150 22 USA 2.60 978 9 Finland 3.49 995 23 Turkey 0.66 43 10 France 2.19 610 24 Hungary 0.95 144 11 Germany 2.55 692 25 G. 7 2.47 791 12 Greece 0.65 112 26 EU15 1.95 532 13 Italy 1.16 305 27 EU 25 1.85 463 14 Japan 3.15 833 28 OECD Total 2.24 589

Source: L’OCDE en chiffres, 2005* in 2000; ** in Euro. We can see from this table the special attention given by the developed countries to

the scientific research and technological development expenses, which reflects in their contribution to the economic growth.

The developed countries understand and make important investments in research, considering them profitable long term or very long term investments. The situation in our country is in evident contrast with this global tendency.

Within the science system, the economic science permanently evolves in correlation with other sciences and, especially, with the natural sciences. The revolution in natural sciences, starting with physics, brings once more the concept of “perfect prediction” to the attention of exegetes, as a subject of economic science. In this sense, an elitist current of economic thinking accepts, in fact, the transformation of economic science into an exact one, like any other natural science. As a consequence, the notions, theories and methodology of the economic science should by deeply reorganized. As an example, the economic balance theory, born from the progresses made by Newton in the mechanical physics domain, is about to give way to the theory of imbalance, of chaos, because of the revolution in modern physics. The fact that many economists invoke the chaos theory is conclusive evidence.

Another feature of the economic science is the shifting towards interdisciplinarity and multidisciplinarity. The causes of this shift are: the complexity of the object assigned for analysis; the penetration of science into all compartments of the economic life; the technicization and instrumentalization of the scientific knowledge activity; the implementation of a more tighter bond between pure science and applied science, between the fundamental theoretical disciplines and those experimental-applicative; the stress on the historical dimension of science; the transition towards theories with a high level of structural organization, opened to natural and artificial environment etc.

In this context we must emphasize the importance of social significance held by this economic phenomenon that is social by nature. That is why, when decisions regarding the economic policy are adopted one must take into account the dimension and social impact that they are bound have, otherwise, sooner or later, there will be great expenses, economic, social and ecologic imbalances hard or impossible to deal with. The economic science has, first of all, a strong social determination. By consequence, action must be taken for a rational economy in the entire society, based on the mechanisms of the free market


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characteristic to the pluralism of the property types, on an honest, fair and legal competition, on definite and equal for all rules, for an economy that won’t waste resources and won’t destroy the natural environment, an economy, in which equal chances can be provided for all regarding access to information, culture, markets, technologies, loans etc. In this way, the economic facts and acts can satisfy the needs of every person, giving them back their dignity and allowing them to fully enjoy the rights and freedoms proper to the human essence.

Along with the occurrence of the first elements of “global civil society”, the social problem reemerges, as an opposition to the forces behind the globalization process.

In this kind of circumstances, the economic science comes, more and more, into direct contact with natural sciences, legal sciences, technical sciences and so on. It must approach the more complex person, namely as a consumer, as a work resource, as a decider, opening new paths of investigation and offering more precise instruments of measuring, improvement and capitalization of the proper economic analysis. We can infer from the above that there is an intimate relation between economy and democracy. The experience of the totalitarianism systems from the past century shows us that the economic development and the plenary statement of human aspirations, the observance of fundamental rights and freedoms of the human are only possible in democracy. For this reason, by reducing the citizen only to its consumer dimension generates the premises of a new kind of totalitarianism, an extremely dangerous one.

This way, the economic science also comprises in its research domain the role of the state at the present. But, we are speaking about the state as a social cohesion organizer, a regulatory state, an arbitrator state and, last but not least, as an economic character. In the present, this kind of vision on the state rehabilitates the public services and their social utility, in the sense that the population demands comprehensive and high class public services regarding health, education and social protection, at international performance standards. Health, culture, person safety can’t and shouldn’t be transformed into commodities.

Another feature of economic science and, implicitly, of economic research, is the increased level of mathematics application in the economic phenomena and processes research. Mathematics proves to be an essential and indispensable instrument for models elaboration, for analyzing and explaining the profound sides of the economic phenomena and processes, for seeing them in advance and for discovering the elements of relative truth in economy.

In Alexander Rosenburg’s opinion, a renowned specialist, the application of mathematics in the economic research in a rising proportion derives from the fact that “the economic science is not a discipline, but a particular theory, of extreme type, and, therefore, through its nature, realizable”(1). However, economy is not the domain of the mathematical instrument absolute supremacy. In this sense, Anghel Rugină emphasized that „in reality, the origins of our present problems can’t be just quantitatively expressed” (Rugină, 1993). By extension, the relation between the economic science and mathematics must be well understood and applied, as well as in the case of other sciences, providing the necessary unite, implicitly, through the communicability of the national, conceptual systems, by creative efforts coming from both sides.

An obvious characteristic of the economic scientific research is the integrative approach to the economic phenomena. This means changing the classical, analytical model of economical thinking with the synthetic-integrative one. Therefore, integrative disciplines like: cybernetics, the theory of communication, the theory of systems, semiotics etc that favor the transfer of methods, principles and concepts between science domains, are formed.

Thus, a shift of science and economic research towards the area of expertise of logic, where the common, empirical knowledge combines with the scientific, systematic one, is realized. Different logical methods are built with the help of some generalizations of the essential aspects, common to a mass of homogenous phenomena. Thus, the economic science carries out systemic functions as: the methodological function, through which critical


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analysis and methodical evaluations of real facts are made, transcending their immediate and manifesting appearance, profoundly, to their essence, that favors the order and systematization of the empirical material; the heuristic function, namely that discovers new facts and laws; the explicative function, namely of understanding known facts; the prospective or predictive function, that allows the anticipation of relations between facts, the establishment of some predictions regarding the prefiguration way of economic reality in the future.

We also point out that the causality, probability ideas are making their way, more and more, into economic science and research, using, at the same time, more persistently formal logical methods as: axiomatization, formalization, and modeling.

Epistemologically, the biggest problem that interferes in the economic scientific research is the result testability or checking, namely the experimentation expansion as a checking method of allowed hypothesis. Unlike natural and technical sciences, where there are relatively large testing possibilities, the economic science is more limited because of the economical phenomenon specificity, that directly involves the human with its needs and interests system, and because of the study object dynamics, the high social cost of the experiment etc. Practically, the economists rule out the possibility of the lab experiment, on humans and groups of humans. Paul Samuelson, Nobel Prize laureate for economy, points out that “We can’t make controlled experiments like the chemist or biologist. For the most part, we must settle for observing, like the astronomer and meteorologist”(2). Also, in the Britannica Encyclopedia is written that “There is no laboratory, in which the economists could test their hypothesis. Economy is essentially a moral science” (Hausman, 1993).

We emphasize that other forms of experiments, like the econometrical tests, the investigations and polls, the simulation, the scenario, have an important role in the investigation and evaluation of economic phenomena. In this sense, Maurice Allais, another well known Nobel Prize laureate for economy, points out that “The contemporary literature offers us lots of examples of aberrations, that can be made when the essential principle is neglected, principle which states that a theory is valuable only when it agrees with the observed facts and that the only source of truth is experience. The submission of experimentation data is the golden rule that dominates any scientific discipline”(3). Therefore, the experiment, in spite of the criticisms received, is a main testing procedure of hypotheses and a main substantiation procedure of scientific conclusions. On the one hand, the absolute and relative progress is explained through the unprecedented increase of electronic calculus possibilities and of economic phenomena molding techniques, and, on the other hand, through the powerful diversification of the experiment.

2. The economic scientific research. The production neo-factor The understanding of the economic scientific research problem as a production neo-factor

implies two groups of coordinates. The first category is that of preparation, of professionalism, with its formative educative aspects regarding the research staff; the second one refers to the content of the proper scientific research, with its aspects regarding knowledge and creation.

Because of the major economic stake and the predominantly axiological chronology, the achievement of the scientific research aims are placed at a high level in the public attention, the actions and responsibilities implied by the scientific research being, firstly, of national interest for the entire population.

The scientific research seen as a production neo-factor represents a complex of elements that confer a new orientation of high performance, giving them, in general, a dynamic ascending, intelligent and innovating character. The components of the scientific research are specific elements of accession in the production process, in the entire economic


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activities, representing modern necessary and sufficient conditions for developing these activities that have as result economic goods.

The scientific research is materialized in resources and new availabilities brought in active shape by the contribution of the creators and by the attraction in a specific way in the economic circuit, by allocating and consuming them according to pre-established destinations chosen by economic agents modern manufacturers. In this sense, the research operates and conveys systematically scientific data that are distinguished as existential entities with a certain degree of generality. The scientific research is deeply involved in the production complex, as well as the in the circulation complex.

Using the scientific data as an object of economy involves the emphasis of some specific characteristics(4) like: incorporability, namely the information, as an intellectual elaborate, has a symbolic, immaterial nature, so that we must not mistaken it for the physical support on which it is recorded in order to be transmitted or used; durability, namely the information has a perennial existence and it’s consumed without being destroyed, no matter how long it’s been used; moral wear, namely the evolution of knowledge determines the superannuation of the existing information content that becomes obsolete for using, making way for a new one; the non-additive character, namely for a holder the addition to an existing information of a an identical one in content and shape is economically unjustified.

This kind of characteristics connect with other characteristics that refer to human nature information in regard to origin and final destination, as well as to the role of information as a substitute for other resources (matter, energy, work), being capable of free and co-available propagation through communication. Thus, the information exercises its’ presence and effects in the scientific research in the entire cycle of life of the production factor. The scientific research generates intelligence carrying wealth, contributing to the definitive escape from utopia and periphery. It is the creator of new ideas, lifting the performance and understanding to the highest international standards of competitive economic efficiency. Of course, this implies the probity of the scientific researcher, the veracity of the explicative model and its exercise for synthesis and solutions, without eluding the fact that the ideas can’t be deprived of the generosity with which they determine feelings, impressions or emotions.

The new production factor has a dynamic character being in a mutual relation with the essence of society, in the sense that it is, at the same time, the cause and effect of its evolution. In the present, the role of the scientific research stands before some new challenges generated by the stage of society. Some specialists consider(5) that the level of informational society has already been over-passed, the informational society being characterized by the adoption of the computer as a work, communication and daily life instrument, transcending to the knowledge society, based on creativity, innovation and its capitalization for the good of mankind.

Romania is in a special state, being able to compress the stages of this natural process, transcending from a poor and impoverished country situation to a situation where it has an educated population decisively connected to material culture flows increased by a high performance, permanent and financed accordingly scientific research, in the higher educational system, as well as in the institutionalized units of scientific research.

In order for this to happen, the scientific research and educational system must be made a national priority. We support the idea that they must be conceived and achieved in a unitary, coherent scientific research and educational system, created in corresponding proportions, based on the type, level and utility of the system, by the state, the economic-social environment and the citizen himself, without mentioning the disparate segments or delimitations on diverse restrictive criteria. The acceptance of this system in cybernetic sense must determine its institutionalization and promotion as “communitarian patrimonial monopole”, to which it should be participated with a thorough professional-scientific background, in precise conditions and with an appropriate economical and social-cultural


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finalization. This system is a public good, regardless of the institution property form that it promotes, stimulating the development of society and the capitalization of the human with its’ needs and interests.

The proper scientific research (Popescu et al., 2000) is a complex process of scientific knowledge that includes scientific creation and education, systematic in schools, contributing to the economic-social progress (Figure 1).

Figure1. The proper scientific research The two components of scientific knowledge overlap in the university area. We point

out that: 1. in the university system, a thorough professionalized educational process is provided and, for the most part, updated in accordance with the new scientific conquests; 2. in the university system, the students learn to execute scientific research and, practically, perform it under the teachers’ guidance.

We also introduce in the content of scientific knowledge the scientific education, taking into consideration the fact that each new research subject in the active period of a person implies an accurate past knowledge of all interdependent phases and stages of scientific research. Nobody can create anything before rigorously learning the scientific creation of the predecessors. This doesn’t mean that we deny the specific differences between education and creation; we underline, in fact, the need of continuity in research through the permanent evaluation and capitalization of the previous works.

This way, we emphasize that the word “create” means to invent, to conceive something new based on following certain informational circuits and on discovering specific connections, while the word “educate” means to seize science, to attain and understand what science has already conquered.

The organic interdependency of these two sides is imperiously necessary, but we must take into consideration that not any education automatically transforms into a scientific creation and, at the same time, the danger of conservationism settling in and the knowledge to become obsolete may emerge on both sides. This is why it’s useful to permanently operate, under all circumstances for the active methods promotion that participate in the process of logical education and for the flexible organization of the scientific creation, by viewing and rendering more efficient every stage of the scientific research.

The scientific research involves many stages, each one of them having interdependent operations, phases or specific sub-phases, namely each of them being connected to the precedent and the successor, without a rigid delimitation between them or in their absolute succession.

In this context, we emphasize the special significance of the economic phenomenon explanation, the formulation and checking of the scientific hypotheses and conclusions. In

Scientific knowledge

Scientific creation Scientific education

University

Firm

Governm

ental

Academ

ic

General

High-school

University


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general, these reflect the creative content of the entire scientific research discovered and systematized through methodological operations like: scientific observation; hypothesis elaboration and theoretical model building; conclusions and solutions substantiation; analysis and economic measuring methods, techniques and instruments definition; creation of new hypotheses and models elaboration and testing procedures etc.

In this stage, operations that contribute greatly to the crystallization of the scientific research as a production neo-factor are accomplished. Here the impact of the phenomenon or of the economic process on the selection and usage of the most different calculus and analysis methods and techniques happens, the hypotheses and theoretical constructions (models) are elaborated and verified, the proportion in which the scientific researcher disposes of all options and knowledge that the study of a certain phenomenon implies, is affirmed and verified, the act of scientific creation locates in essence.

Also, in this stage the greatest efforts for improvement and modernization of scientific research, as well as for its methodology, are made, increasing the economic science capacity to stimulate the efficiency of the real economic activity. But, also here the most part of errors and drawbacks that are reproached to economic science manifest themselves. The synoptic presentation of this stage is significant (Figure 2).

The underlying of the importance of this stage must not leave the impression of underestimating the other stages; each stage has its’ functions and contributes to the sum that we are trying to achieve in the explanation, evaluation and stimulation of the economic phenomenon or process, in the continuous flow of its renewal.

Figure 2. The place where the economic phenomenon and the methodology of economic scientific research is explained

The Economic Theory

The Economic Problem (the theme)

The Economic Practice (empirical facts)

Documentation: Bibliographic direct (factual, empirical)

The explanation of the economic phenomenon (the proper research) (the scientific observation, the selection and utilization of the work models and

techniques, the elaboration and test of hypotheses, models and conclusions etc.)

3.1. The formulation of hypotheses and theoretical model

The logical analysis, mathematical measuring methods and techniques, inter/multidisciplinary case studies

3.2. The scientific observation, the systematic approach, the causal relation

3.3. The testing of hypotheses, models, conclusions and scientific solutions

Testing procedures of hypotheses, models (experimentation, simulation, scenario etc.)

The redaction and public sustaining of the work Capitalization of the scientific work

The incubation (The illumination)

(1)

(2)

(3)

The hypotheses and models elaboration procedures


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The economical problems accrue from the constant confrontation of the existing theory with the new empirical facts. They become research subjects and are proposed to be approached and solved by researchers individually or in research teams. The solving process of an economic problem is attained on the basis of two actions: a creator-constructive one, where hypotheses are elaborated and formulated; and a critic-capitalizing one, where the constant testing of hypotheses takes place (Figure 3).

Figure 3. The genesis of economical problems

The economical problems can be the result of falling behind on an economic activity aspect or another or can be formulated by researchers based on the desire to develop the economic science. The knowledge of the economic theory insufficiency in regard to the empirical facts, the evolution of real economy, is the most fertile moment of economic scientific research and, at the same time, the hardest because of the complexity and dynamism of the internal and international economic life.

The documentation for the scientific research has a complex content determined by two components: scientific reporting and the proper scientific documentation. The reporting is the complex process through which a specialized unit of the documentation network systematizes the scientific literature on well established criteria and provides the beneficiary the result by adequate methods. The proper documentation is the process through which the specialized unit provides the solicitant with the documents requested by him after the first process, the reporting.

The explanation of the economical phenomenon or the proper research is the most complex stage of the scientific research methodology because in this stage deep observance, hypothesis, interpretation, conclusion and testing related operations of the researchers’ conclusions and proposals are attained through adequate methods, techniques and procedures. It generates the incubation or the illumination that materializes into a theoretic or pragmatic discovery of great significance for the economic science and for the development of real economy.

The writing and public reading of the scientific work is next, as well as its capitalization, through which the social value of the respective scientific research is, in fact, validated.

Hence, the legitimacy of the scientific research as a production neo-factor is reflected through, its capacity to capture the perennial function of the scientific knowledge in individual decisions and actions, as well as, especially, a new social-economical reality defined by major attributes like: the predominance of the conception acts and of activity logic guided by projects; the systematization of the practices characteristic to the work based on the rigorous scientific knowledge and the extension of specialists professional training; the proliferation of activities based on scientific research in the detriment of those strictly

Empirical economical facts

The Economic Theory The Economic Research Methodology

Economical problems for

research


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accustomed; the development of a scientific research “industry” and of a specific market for this industry etc.

In these circumstances, the intellectual property in modern society is crystallized more clearly, together with the main groups of rights associated to it: rights regarding the object of the intellectual property and moral rights of the researchers and scientific research institutions. Under the legal aspect, the object of intellectual property is protected through special procedures like: copyright; patent; trademark etc.

In the context of Romania’s accession to the European Union the importance of scientific research is increasing, as an individual and communitarian necessity in the effort to adapt to the national economic environment, as well as to the international one. Currently, more than ever, you do research to know much more than you knew until now and to approach in a good way a new step of the economic activities. The scientific research must help to better satisfy the current needs, so you can create because this action is better paid, so you can go forward through occupations and ranks, so you can feel freer in society.

Furthermore, the Romanian scientific research must relate not only to the European continental integration exigencies, but also to the world globalization ones. It is the only way in which the Romanian can stay a Romanian, and win and live anywhere in the world, where he feels more fulfilled; this changing also the meaning of concept of nationalism, also globalized in a world of profound scientific knowledge, creativity, innovation, a civilized and modern world under all aspects – economical, social, moral, in behavior.

The global dimension of the economic scientific research is obliging us to prevision the liberalization of the scientific research market at a global scale, making possible for research antennas of the research institutions from outside our country to appear in Romania. This way, it will be even harder to keep up with the competition at home and it will even harder to export the scientific research with its results.

Notes

(1) Mark, Blaug, “Teoria economică în retrospectivă” („The economic theory in retrospective”), The Didactic and Pedagogic Publishing house, Bucharest, 1992.

(2) See Paul, A.Samuelson, „Economics”, Mc.Graw-Hill, 14th edition, 1992. (3) After Maurice, Allais, “La théorie générale des surplus”, vol. I, II, Dalaz, Paris, 1981. (4) Some specialists consider the contemporary science as a “neo-factor”, as being one of

the most important economical progress resources, an immediate productive force (see Aurel Negucioiu, „Dezvoltarea mai rapidă a ştiinţei, lege obiectivă a lumii contemporane” („The faster development of science, the objective law of the contemporary world”), in the „Analiză şi prospectivă economică” („Economic Analysis and Prospective”) magazine, no.3/2006). We assimilate this opinion considering it important and useful, but we think that science is not only in the production area involved, but in the circulation area as well, being concomitant and satisfactory. That is why I state that the contemporary science is an important production neo-factor, involved in modern production (this modern production having a new content and a new expression) and in all components of the current circulation sphere. The scientific research has become an endogenous factor of the entire economic activity, a new and important modern resource, with a great productivity capacity in the economic system.

(5) After Ion, Gh.Roşca, „Învăţământul superior, O abordare postindustrială” („The higher educational system, a postindustrial approach”), Theoretical and applied Economy, AGER Magazine, No.1, Bucharest, 2006.


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Bibliography

Barrow, John D., “Despre imposibilitatea Limitelor ştiinţei şi Ştiinţa limitelor” (“Impossibility: Limits of Science and the Science of Limits”), The Technique Publishing house, Bucharest, 1999;

Berinde, Mihai, „Procesul creaţiei şi misterul creativităţii, în Inventică şi Economie” (“The process of creation and the mystery of creativity in Invention and Economy”), no.4/April 1998, edited by „Tribuna Economică” (“The Economical Tribune”) Magazine, Bucharest;

Burloiu, Petre, „Managementul resurselor umane. Tratare globală interdisciplinară” (“Human resources management. The interdisciplinary global treatment”), Lumina Lex S.R.L., Bucharest, 1997;

Dickinson, John P., „Caractéres distinctifs de la recherche scientifique”, in „Science et chercheurs scientifiques dans la société moderne” volume, Paris, UNESCO, 1988;

Hausman, Daniel, „Filozofia ştiinţei economice” (“The economic science philosophy”), Humanitas, Bucharest, 1994;

Hirschman, Albert O., „Pasiunile şi interesele”(“The passions and interests”), Humanitas, Bucharest, 2004;

Hollis, Martin, „Introducere în filosofia ştiinţelor sociale” (“Introduction in the social sciences philosophy”), Trei, Bucharest, 2001;

Iancu, Aurel, „Ştiinţa economică şi interfeţele ei” (“The economic science and its interfaces”), The Economic Publishing house, Bucharest, 1993;

Mihuleac, E., „Bazele managementului” (“The bases of management”), Tempus, Bucharest, 1994;

Moore, A., „Creativitate, descoperire, invenţie” (“Creativity, discovery, invention”), The Scientific and Encyclopedic Publishing house, Bucharest, 1975;

Popescu, C., Răboacă, G., Ciucur, D., „Metodologia Cercetării Ştiinţifice Economice” (“The Economic Scientific Research Methodology”), ASE, Bucharest, 2006;

Roşca, Al., „Creativitatea generală şi specifică” (“The general and specific creativity”), The Academic Publishing house, Bucharest, 1981;

Röegen, Georgescu N., „Legea entropiei şi procesul economic” (“The entropy law and the economic process”), Bucharest, 1979;

Rugină, A. (1993). Principia Oeconomica, The Romanian Academic Publishing house, Bucharest

Schatzman, Evry, „Ştiinţe. Statutul ştiinţei în Encyclopedia Universalis” (“Science. The Status of science in Universalis Encyclopedia”), Corpus 20, Paris, 2002;

Seneca, „Scrieri filozofice alese” (“The chosen philosophical writings”), Minerva, Bucharest, 1991;

Ţopa, L., „Creativitatea” (“Creativity”), The Scientific and Encyclopedic Publishing house, Bucharest, 1980;

Vlăsceanu, Lazăr, „Metodologia cercetării sociologice” (“The sociological research methodology”), The Scientific and Encyclopedic Publishing house, Bucharest, 1982;

Zorlenţan, T., Burduş, E., Căprărescu, G., „Managementul organizaţiei” (The organization management”), The Economic Publishing house, Bucharest, 1998.


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ECONOMIC AND SOCIAL COSTS OF THE DEFICITS OF COMPETENCES IN ROMANIA

Alecxandrina DEACONU Ph. D. Professor

Cornelia LEFTER Ph. D. Professor

Academy of Economic Studies, Bucharest Abstract. Thouroughly prepared for a long time and carried out according to specific steps,

the enlargement process of the European Union generates undoubtedly positive effects for the Member States. However, there are also involved certain negative phenomena.

The purpose of the present paper is to analyze the situation of the labour force in Romania and to identify the favoured fields of activity and those seriously threatened by the deficits produced as a result of the persons’ freedom of movement in the newly created economic and geographic space.

Still on course, the research done so far allows an interesting X-ray of the current state of things in the medical, education and construction fields, confronted more and more with the scarcity of human resources and justifies thus our intention to enlarge the area of investigation. At the same time, the paper approaches also some favoured fields, such as the banking field, which attract and maintain easily the labour force due to their nature of activity and to their efficiency.

On the basis of these conclusions, we will be able at a further stage of this research to develop mechanisms that can be used, at the macro and microeconomic level, in the view of diminishing the economic and social costs of the deficits of competences registered in numerous business fields in Romania.

Key words: human resources; deficits of human resources; competences; social costs.

REL Classification: 14C

1. Introduction The period that prepared Romania’s adhesion to the European Union and the

tormented current situation of the real integration justify a normal question: “Are we able to manage the process of integration so that to create opportunities for the economic development and for the favourable evolutions in the other fields of national interest?

The answer to this question involves, logically, a correct anticipation of the possible problems that can occur in various activity fields and a competent intervention to solve them.

In the following, we will refer to recent evolutions on the labour market in Romania and to the costs generated by the deficits of competence in certain fields of activity. We will focus especially on the problem of unemployment (imposed or assumed by the Romanians) and on that of the strong exodus to work abroad.

As regards the unemployment, according to the National Institute of Statistics, we can see that in the second quarter of 2007, the active population of Romania was of 10,1 million persons, of which:


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- 9.443 million active persons and, - 660 000 ILO unemployed (defined according to the criteria of the International

Labour Office). The activity rate of the working age population (15-64 years) was of 63.9% and the

rate of occupation of the working age population was of 59.6%. Most of the employed working age Romanians were the graduates from high

education (85.8%). As the level of education decreases, the rate of occupation decreases too. Thus, there were 65.1% persons employed of all those with a medium level of education and only 41.2% of those with a low level of education.

The ILO unemployment rate was thus of 6.5% (in decrease as compared with the previous periods). The highest rate was registered for the graduates from the medium and short education (7.2%), while the rate registered for the unemployed with high studies was much lower (2.8%). The long term ILO unemployment rate (unemployment rate of an year and more) was of 3.3%.

Taking into account the geographical criteria, the most important reductions of the unemployment rate were in Vaslui, Harghita, Călăraşi and Timiş. As regards Bucharest, the Municipal Agency for the Occupation of the Labour Force (AMOFM) points out in April 2007 a rate of 2.21%, in decrease as compared with the previous periods. Of the total of the active population of 955 000 persons, Bucharest has 21 086 unemployed people. Taking into account the structure of the unemployment by gender, we can notice a lower level of the unemployment rate for women than for men.

It can also be noticed that the employees represent the greatest percentage (65.8%) of the occupied population. Distribution by groups of activities shows that the farmers and the qualified workers in agriculture, forestry and fishery represent more than a quarter of the total of occupied population, followed by the handicraftsmen and by the qualified workers in handicraft jobs. (16.2%).

The second aspect we took into account regarded the intense work flow of the Romanians. The opening of the labour market for the Romanians, although benefic from many points of view, requires also the designing and implementation of proper policies aimed to favour the preservation in Romania of the high qualified labour force. It is essential for Romania that the mobility of the workers on the international labour markets should not exceed certain tolerance limits.

We will point out in this paper the quantitative and qualitative consequences of the labour force in the construction, medical and banking fields.

2. The deficit of HR in the construction field

In Europe, the construction field represents one of the biggest fields of activity, with an annual turnover of 900 billions euro. Only in the Member States of the European Union there are over 12 million employees.

As regards the construction field in Romania, it provides around 10% of the GDP and it has been facing in the last years a strong personnel crisis. Some observers of the phenomenon state that the deficit of workers is of 150,000 persons. Nowadays, officially, in the construction field there are approximately 500,000 workers. Unofficially, if we take into account the fact that this is the field with the biggest labour force on the black market, it counts for 700,000-800,000 workers.

The reason for the deficit? The huge leave for abroad, in countries such as Italy, Spain, Germany, Israel. Currently, only in Italy there are over 40,000 Romanians in the construction field.

Besides the shortage of workers, this field is confronted with poor qualification. Out of the 394,000 persons working legally in Romania in the construction field, about 7% are not qualified


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and most of the qualified persons are old. The young people do not choose this field because the salary level is low and the work conditions on the construction sites are quite poor.

Nobody has quantified for the moment the losses caused by the lack or the migration of the personnel, but the experts think that these are increasing and the future does not seem to provide spectacular solutions.

Confronted with this situation, the managers have already taken measures in certain directions:

- the permanent surveillance of the works in order to avoid the decrease of quality. - getting the salary level closer to the offers in the Member States of EU. The experts

estimate that in a short time the average gross salary in constructions will reach a level of 500 euro/month. Taking into account the geographical criteria, the highest average netto salary is in Transylvania (approx. 1,400 Ron/month). On the other hand, Moldova is the region with the lowest salaries (approx. 800 Ron/month). Currently, according to the information supplied by the Romanian Association of the Entrepreneurs in Constructions - ARACO, the workers who work in constructions in the countries of the European Union, qualified or not, benefit from netto salaries of about 190 euro – in Estonia, 250 euro – in Hungary, 500 euro - in Croatia and 1,800 euro in Italy.

- designing and implementing the possibility to hire foreign workers from Turkey, India, Pakistan, Republic of Moldova or China. They can cover the deficits and in many cases work with low salaries.

- orientation of the small construction enterprises (that do not have access to big and expensive projects so that they could afford a certain stability of the labour force) to the villages and commune nearby the big cities in order to recruit labour force. However, the qualification in these cases is doubtful and leads in many cases to expensive consequences for entrepreneurs.

- creating measures for preventing the risks of accidents and diseases. The reports drawn up by the Labour Inspection show that in Romania, the most accidents at the national level occur in constructions. This happens because in this field there are lots of breakings of the legal regulations regarding the work security and safety. It should also be paid attention to the risk of employees’ diseases. The boom of the constructions does not lead automatically to the improvement of the quality of the materials used. Some of these products are harmful for workers and population.

We specify that a part of the PVC profiles sold in Romania contains asbestos, a material considered cancerous and forbidden in the Western European states. Moreover, the use of certain adhesives, such as the polyurethane foams, produces serious effects. Yearly in Romania are sold 3.5 - 4 million tubes of polyurethane foam, ignoring the fact that recent studies carried out in USA showed that during the use of this product there is given out a significant quantity of vapors of diphenylmethane diisocynate (MDI) that produces asthma, allergies, lung or even cancer.

The difficulties encountered made the specialists in the construction field reflect upon them and search for solutions for stopping the crisis of the labour force. Here are some of these solutions:

- reducing the deficit of competitiveness by investing in the technical and human resources;

- accession to the cohesion funds for the personnel training; - resorting to certain associative mechanisms that can afford the presence in the

projects of constructions and the negotiation of some correct unitary prices; - negotiation of legislative solution with the state in order to reduce the work on the

construction black market; - promoting some intensive programms of professional training in constructions; - monitoring the migrating flows of workers in constructions, to and from Romania. - creation of consortia (clusters) of construction enterprises. Several societies

announce their participation to these consortia and thus united can have access to the tenders for works with a big and very big value.


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3. The deficit of HR in the health field

The medical system in Romania is in a crisis state for a very long time. The initiated reform has not produced results yet. Most of the medical institutions are confronted with serious problems regarding the insufficient volume of the assigned financial resources and regarding the low managerial competence, all these in the context in which the requirements of the insured people are naturally increasing, as they are paying dutifully the health insurance contribute to the budget.

Beside all these, there are some deficits on the labour market. In Romania there are around 50,000 doctors, out of which 10,000 are residents. We

can also add another 15,000 dentists. The latest data of the National Institute of Statistics show that out of the

approximately 50,000 doctors existent at the national level most of them (app. 11,000) work in Bucharest and the less, (app. 270 doctors) work in Ialomiţa. It is considered that 30 000 of all the doctors are still active, while the rest of them have applied for work abroad.

As regards the rural area, the situation is critical. In most of the communes there are provided only the basic services and for specialized services people have to go to the medical units in the cities, which are more or less close.

If in 322 communes (12% of the total) the presence of the doctors is satisfying reported to the number of inhabitants (approximately 1 doctor to 600 inhabitants), in other 148 communes (6%) there is no doctor and in 378 communes (14%) there is 1 doctor to over 3,500 inhabitants.

In comparison with the other European countries, Romania has the fewest doctors reported to the number of inhabitants. Every year, about 20% of the young graduated immigrate to the United States. Taking into account the accession to the European Union, Romania risks losing even more doctors, because Great Britain, Germany, France and Spain need doctors for the rural areas.

The problems caused by the faults of the system, the absence of the satisfaction in work, the lack of motivation and, even worse, the existence of certain conflicts employer-employee in certain institutions made a significant number of the personnel choose the solution of working abroad.

The real exodus towards better paid jobs that could offer the chance to work with dignity created an imbalance as regards the human resources and especially the experienced and well prepared medical professionals. As a paradox, the medical units that until recently have complained about the surplus of medium and auxiliary personnel begin to face the situation of not being able to provide the medical services and hire less experienced and trained persons for determined or undetermined period.

According to a research carried out during April and May 2007 by the Department of Philosophy and Sociology and by the Faculty of History and Philosophy of the “Dunărea de Jos” University in collaboration with “Medical Solidarity” Federation in Romania, there was registered an insufficient motivation of the personnel. Thus, there are significant the following:

- the medical personnel’ tendency to work abroad has still an alarming level (64.89% are tempted by the prospective of a better salary; 85% declare that they have colleagues who work abroad);

- the main reason for leaving the country is represented by the low salaries. 36% of the interviewed consider that a salary between 500-800 Euro would motivate them to stay in Romania. More than 46% would stay for a salary over 800 Euro. It is considered that by 2009 there will be a significant immigration flow and most of the people that will stay here have parents working in the same field so they can keep their office;


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- there is a low motivation as a result of the fact that the employees do not feel that they are appreciated according to their activity and performance;

- it prevails the idea that the rights they have as employees are not respected (53.85%). All information obtained from various researches supports the idea that as long as a

Romanian doctor can obtain with his/her specialization a salary of over 3000 Euro/month in the Member States, it is thus normally to foresee that the doctors’ exodus will include also the youth.

Besides working abroad, the young residents can choose another solution: working as medical representatives for the companies selling medicines. The reason? A monthly salary 5-6 times higher than they would get in a hospital (app. 900-1300 Euro). Besides the salary, the medical representatives also get a car, telephone, computer and ca obtain bonuses or a premium.

There are frequent situations when the residents complain about the treatment conditions for their patients: shortage of medicines, medical equipment from ’50-’60s, lack of computer systems, the inefficient bureaucratic system, buildings so decrepit that remind of the Middle Ages.

All these signs require a reaction that should stop the leak of competences created with significant (financial) efforts in Romania.

4. The deficit of HR in the banking system

The banking system in Romania, despite its sustained dynamics, is far from its objectives. To exemplify this statement, let’s look at the number of the new banking units created during a year: 1100 banking units in 2006 and an estimated number of 700 new branches for 2007. It is estimated that Romania was in 2006 on the third place in the top of the biggest increase of personnel in Europe, after Ireland and Estonia.

The consequence of this phenomenon? The emergence and the amplification of an unparalleled crisis of qualified personnel that led to a real hunt for employees and consequently to an important increase of the related costs.

In general, the deficit of specialists in the financial-banking field is registered in the case of the middle and top management. If in the administrative field, in the entry-level, human resources or IT, it is easier to cover the free positions, for the very specialized and technical positions, such as sales or department management, it is very difficult to find specialists.

Besides the deficit generated by this increase, it can be added the significant personnel migration flow and the orientation of many specialists towards “freelancing” (people work on their own and offer their services to the banks, without being hired by them) that makes even worse the lack of personnel in this field.

All the forecasts suggest that this phenomenon will become even more intense. We are still under the European average of banks per capita and consequently the banking system will undergo a process of aggressive expansion, as the specialists estimate on the basis of the experience of other states. For another three years we will witness a fierce competition between these institutions in the recruitment field and thus to a process of hiring that will not take into account the level of competence of the candidates.

After this aggressive period of expansion, when the market is saturated, the banks will begin to renounce to the employees with very high salaries in the favour of those with lower salaries.

At the beginning of this year, the banking network in Romania has 5,149 branches and agencies and the number of employees in the banks was up to 70,000. Any comment regarding these figures should start from the aimed objective: by 2010, the banking system should reach 110,000-120,000 employees.

All this information trigger an alarm signal: the human resources impose a speed limit for the expansion need of the banks and raises two problems:

- limiting the efficiency and - increasing the operational risk.


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In order to diminish the negative effects of this situation, the managers of the banking institutions used especially the tools offered by the retribution policies, by the partnerships with the institutions of high education, by the use of the training programmes, by the career programmes and by the motivation tools. The results obtained are still not satisfying because in most of the cases the employers do not solve the problem for a long term, but for a short term, recruiting personnel from the competitors. This hunt will leave open positions and the company that lost employees will also begin to recruit others from the competitors. This leads to fluctuation and increases the salaries above the normal limit of supportability in this field.

Conclusions

Concerned to understand and foresee the consequences of certain phenomena that take place in the Romanian economy, we and the practitioners are extremely interested in knowing their current manifestations on the labour force market. We know that, unlike the imbalances in other fields of activity, those in the human resources area require lot of time, ability and coherence in actions. At the same time, the effects produced by the scarcity of the labour force spread widely and risk affecting the society on the whole.

That is why it is necessary to quantify the consequences and, facing the evidence, to act not only at the microeconomic level, but also at a sector or even national scale.

If we quickly review the costs generated by the current situation of the labour force in various activity fields, we should take into account: the costs regarding the salaries and the related expenditures, the training costs, the costs of nonquality and nonperformance, the recruitment and selection costs, the costs generated by work conflicts, the costs related to the work accidents, the costs produced by fluctuation, to mention only some of them. We cannot ignore though the social or cultural associated costs.

Thus, taking into account these important economic and social costs, we should initiate, besides what is done at the governmental level, actions of harmonization of the managerial practices starting from the specific interests, on a long term, of the business sector.

The hasty isolated actions, regarding the recruitment and selection, the remuneration, professional evolution, fidelity, the development of the own employees can stimulate behaviours unfavourable to performance and lead, most frequently, to a worsening of the economic situation of the companies confronted with an important scarcity of qualified labour force.

Bibliography

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de la angajaţi, Editura Polirom, Bucureşti Dadu, Gh. U., „Relatia de cauzabilitate între procesul migraţiei şi dezvoltarea la nivel global,

Dezvoltarea Internaţională, Banca Mondială”, Bruxelles, 2004 Jason, J. (2002). Less is More - how great companies use productivity as a competitive tool

in business, Editura Portofoliu, Bucureşti Oprescu, Gh. (2001). Piaţa muncii, Editura Expert, Bucureşti Răduţiu, Vonica S., "Analiza comparativă a pieţei muncii în România, Uniunea Europeană şi

ţările candidate", Institutul de cercetare a calităţii vieţii, Academia Română, Working paper, february, 2002

Vasile, V. (2004). Migraţia forţei de muncă şi dezvoltarea durabilă a României-Abordări teoretico-metodologice. Sistem de indicatori şi modele de analiză, Expert Publishing House, Bucharest

Anuarul statistic - Institutul Naţional de Statistică Publishing House (2004, 2005, 2006) http://www.roumanie.com/emploi-marche-travail-statistiques-UE


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BEHAVIORAL QUALITY AND NATIONAL IMAGE

Magdalena IORDACHE-PLATIS Ph. D. Professor

University of Bucharest

Abstract. The paper deals with the behavior of the subjects from economic life in the context of the openness of the external markets and of the development of the international economic cooperation because of the extension of the economic integration of the countries from East Europe.

The objectives of this paper are: • Identifying of the main characteristics of the present behavior by considering the

previous integration in the EU situation; • Analyze of the mutual influences of behavior among national aspects and European

ones; • Identifying the quality tendencies of the behavior at individual and organizational

level; • Defining a model of quality behavior, which positively influences the national

image. The paper is a pleading for an individual and organisational behavior able to be

understood isolated and not generalized in order to lead to a correctly information of the society about the society.

Key words: quality; behavior and image.

The subjects of the economic life face an extraordinary dynamics of the environment they are part of and they must deal with it. Either individuals or organizations as economic agents are elements of a complex system which is rapidly developing: on the market appear and disappear goods and firms, economic relations are restructured, economic operations are developed and simplified by new technology, the communication system evaluate extremely rapid etc.

The behavior of the economic subjects is the modality of their interests manifestation. More or less visible, the individual and organisational behavior is reflected in the adopted decisions: buying or refusal of a product, launching of a product on a certain market, increasing or decreasing of prices etc.

The subject’s origin source is many times an important factor of the action decision of a potential business or dialog partner. Sometimes, the location of production is lost in the context of the international cooperation and of the contemporary commerce. In addition, the


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dynamics of the contemporary business environment characterizes the organisations evolutions in the sense of the development of the institutional relations, of the associations and merges, of conceived behaviors, of cooperating or non-cooperating behaviors, according to some market strategies.

Under such conditions, the existence of a typical model of behavior nor for individuals or organisations can no longer be admitted. Each subject (individual or organisation) is defining a behavior according to some judgments more or less rational, to some identified objectives and interests or some to less clarified purposes. Even if in a national context some reactions, attitudes, behaviors can be considered as prevalent, these can not be generalised to the entire society or organisational community.

In other words, the economic subject’s behaviors must be understood as being isolated and not generalised to the collectivity they represent. In this context, the national image must not be characterized according to some isolated behaviors, which obviously can not be generalised as being the same at social-national level.

Any individual life runs between a choice and another. Every day, more or less consciously, more or less rationally, people choose our options are different from the daily things regarding food, clothes to profound aspects such as the area where I live, the person with who we want to share the chance of success, the field in which we want to work etc.

The human evolution goes parallel with the development of all material and non-material elements, and these transformations in time can be easily observed through the differences between generations. How our grandparents have grown up, how our parents have been educated, what chances of recognition have the young man nowadays and what does the future reserves to our children are only few questions to which answers show the real evolution of the society and the individual development.

At present, in the knowledge society, the human life is lived rapidly. It seems that people are in a permanent speed when they act even it what they are going to do will affect more or less their existence. In other words, the more achievements fever, not necessarily material ones make the subjects in the knowledge society not to consider very much before choosing. We are in a hurry in the choosing process. The effect of a such choice, beyond the earned time can be far from the supposed one.

For instance, the superior studies fever makes many young people to choose areas in which the access to studies is simplified, but in which they can not develop their own aptitudes. Therefore, it appears the universitary studies desertion or the young man succeeds in finishing his studies in an area in which he will never work. At the same time, the study variety from the desire of satisfying the parents preferences in combinations such as Law and Foreign Languages, Economics and Law, Journalism and Sociology, Social Assistance and Public Administration only diminish the quality and quantity of the received knowledge from each specialization and therefore to generate on the labour market pseudo-specialists. In addition, since the living standards of many young people obliged them to work during the universitary studies, the work replace study and finally the obtained diploma will not be fully covered by the generated competences. Thus, not only the individual loose because he worked when he should have learned, who wanted to get a diploma and ignored its utility of practical value consisting in aptitudes, but the society, as well. The society loose because the investment in education of some young people who will not act in the field of their training or will act of a sub value of the generated competences.

The business fever is specific to companies such as small and medium enterprises which conclude rapid businesses without a serious study of the partners of effects of the contracts because of the lack of specialists or of a shallowness of the workers. Thus, companies face


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looses or smaller profits compared to the situation when they could have analyzed every business from the efficiency point of view. At the same time, the society looses as well since there is a wasting of resources.

The shopping fever is a part of everyone’s life. People go shopping to the supermarkets and throw goods in the basket, reading rapidly the instructions on the packing. People lose the contact with themselves running all the time from one activity to another. People leave their life between choices.

The knowledge society does not simplify by any means the choosing process. On the contrary, it becomes more difficult.

Under such condition, the human behavior is very dynamic, which mean that itself quality consists of many variations from one economic-social environment to another, from one individual to another.

More than that, the transactional analyze which mean a complete theory of the personality take into account human behaviors – attitudes, words, reactions by different instruments (schemes) which demonstrate that a subject behave in an environment in a certain way, but in another context, they behave more or less different. Changing the attitudes, the thinking system and the behaviors can be done very fast.

The human behavior is „the first visit card” of the subject. Thus, the behavioral quality has an important role in the external subject appreciation. Many times, the subject appreciation by others is made based on the already received influences. Thus, this can not be always a correct perception. In addition, the perception can be different from one individual to another in the absence of some major influences.

Marketing explains the creating of different images for the some object or event, as a consequence of the attention, distortion and selective memory processes. Thus, the stimuli to which the subjects are exposed generate different reactions, different interpretations and different obstacles. Thus, promoting a product depends on the supplier capacity of transmitting efficiently the messages in order to influence different buyers in the same way, the latter being consistent to their attitudes and believes. Many times, there is the temptation of ignoring some advantages in the favor of some decisions that not correspond to the already existed conceptions.

At behavioral level, the same situation may arise: a preconceived idea on a social-professional category tends to apply an all its representatives. Therefore, some wrong judgments come up by generalization, such as:

− Civil servants are corrupted; − Professors are non-motivated; − Romanians are violent and dangerous; − Team agers are non-educated; − Engineers are incompetent; − Romanian products are of low quality; − Romanian entrepreneurs are incorrect; − Lawyers are unprofessional etc. More than that, man is tempted to remember from a cooperation, dialog and interaction

eventual lacks or weaknesses and ignore the strengths. If in a market relation, the partner has behaved 10 times correctly and one time incorrectly, then the collaboration continuing is damaged.

The subject behaviors in the Romanian economy have changed during the transition process and in the UE integrating context. The principal characteristics can be summarized as following:


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Characteristics of subject behavior in Romania Table 1

Visible elements of the subjects behaviors Before EU integration After EU integration

• Individuals were tempted by international tourism and understood the abroad access as a special event, being proud of it;

• Individuals have started to travel abroad more easily and even to look at this as being a natural thing;

• Consuming behavior were kept and respected; • Consuming behavior have been expanded by borrowing from West;

• Individuals with deficitary social status had no access in developed countries;

• Free access of all subjects has generated the travelling abroad of some uncorrect and unrepresentative behaviors;

• Regulations on the market processes were not followed many times;

• Regulations on market mechanisms have expanded and become more firm;

Of course, many of the current features of the individual and organizational behaviors

can be explained through the European influences. Most of the times, there are noticed negative influences on consuming which have been expanded in the Romanian economy: drugs traffic and their consumption, trading artificial and even harmful products in spite of rules, less decent manifestations in the daily life for individuals and exaggerated and absolutely decisions in the business relations, even of long-lasting for organizations.

The same phenomenon is havening in a reverse sense: the visible behaviors of the Romanians out of country are the negative ones: steeling, violence, frauds etc.

Why these negative aspects tend to generalize to the entire nation and to be considered representative for the entire Romanian society? Why the Romanian achievements in science, technique are ignored? Why the Romanian Olympics on different areas of science and sport does not count anymore? Why also positive elements are not seen in a manner, which should consider the negative aspects only as exceptions and isolated situations?

Perhaps the people through the institutions they represent of or where they work in are tempted to exaggerate and promote actions that are negative.

Therefore, an education in a positive sense must be done especially at individual level because institutions are represented and are active by the action of their people as individuals. Thus, the negative elements from the social life could be shown as a pointing start for change toward a positive behavior and positive elements otherwise many of them should become a permanent subject for information and not an exception.

Bibliography

Ward, M. (1997). 50 de tehnici esenţiale de Management, Codecs Kotler, Ph. (2003). Fernando Trins de Bes – Marketing lateral, Editura Codecs Kotler, Ph. (2004). 10 proiecte capitale de marketing. Semne şi soluţii, CODECS


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THE ENTERPRISE IN THE EUROPEAN UNION

Paul Tănase GHIŢĂ Ph. D. Professor

Academy of Economic Studies, Bucharest Key words: enterprise; European Society; scale economy; enterprise government;

enterprise size. REL Classification 20B

The European Union member countries’ economies, considered, each of them,

separately or in the interaction among them, make up an economic system of capitalist nature, often called, for ideological and/or political reasons, market economy, and under certain circumstances, functional market economy. The basic links of these economies are the economic units - those structural components which carry out the economic acts or operations by actions which are autonomously decided upon in keeping with the profile of each of them. These units meet, by means of their profiles, all the needs and that is why they re-build the mosaic of the needs system on the pattern of economic activities (production). Out of this great number of economic players, the object of our study focuses on enterprises or the enterprise, generically regarded and sometimes called, more or less rightly, a business.

Enterprises are economic units with lucrative character, but in spite of this common feature, they make up a widely diversified network. It is certain that every enterprise has its own identity which is given by particular features and by the way it relates to others within the economy framework according to some criteria such as the number of employees, the volume of production, sales and capital, etc. Taking into account the real aspect, it is obvious that any of the respective criteria may acquire different dimensions from one enterprise to another. That is why, in order to have a better look at the condition of the enterprises, both concerning what they have in common and what they differ in, within the framework of each legal criterion, there has been established categories, classes or groups of enterprises by means of which it is statistically established what category each of them belongs to. Enterprises order is made according to the size (dimension) which each of them reaches within the legal criteria, therefore, resorting to their statistical defining or delimitation.

The criteria for legal defining are relatively common in most countries, but the statistical ones differ more, no matter if the differences are justified or not from a scientific or practical point of view. Advocates of maintaining the differences have, especially, in view the existence and the dynamics of the differences among countries, mainly concerning the development level and necessity of regarding the national specifics. The differences of higher degree trigger off diverse difficulties for the comparative analysis of the countries and of the world’s areas, they diminish the importance which the promotion of certain specific policies have, they render it significantly difficult the achievement of the market studies, and the advantages created by using a unitary modality of measurement and analysis are lost.


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Taking into account all this, it becomes obvious that the study of the issue related to the enterprise of the European economy cannot be made “at random”, but in a systematic way on the basis of clear and scientifically fundamental delimitation.

To the same effect, it is imperative that we should keep in mind that we are first discussing about the enterprise only in a generic way because, in real life, we have to cope with a world of them. Then we have to know what the place and the role of this world is in the European economy, and not only, because it exists and acts in a cobweb of relations which make up the most important component of the world’s economy with much higher or less lower reverberation on all the countries and integrationist groups.

Starting from theoretical and practical needs, in the last decade, a lot of countries and especially those which belong to diverse integrationist groups have adopted unique models for legal and statistical defining for enterprises. Within the European Union, the decisive step in this direction has been The Commission Recommendation 361/2003/EC (6 May) which came into force on 1st January 2005, and which replaces another former recommendation. The unique model has four criteria by which the legal defining of the enterprises is ensured ,but the fact that its bringing into operation remains at the judge of each country has allowed Hungary to adopt a legal defining with only two indicators (workforce and turnover), Holland and Spain have not adopted the legally admitted community defining, and in the statistic defining, the level of interval limits differs, Romania and Bulgaria which became E.U. members on the 1st January2007 come with their own salient features.

The up-dating or improvement of the legal statistical defining of enterprises remains an issue for the future, too, as it has to keep up with the dynamics of the economic and political national, regional international environments and with the global one as well. In addition, this concern has to give an answer to some long-term needs:

• Delimitation of small and middle-sized enterprises should include all types of such enterprises and especially of the handicrafts and family business ones without employees, or with seasonally paid work and which should be backed up in order to continue their activity and strengthen themselves.

• Delimitation of small enterprises should allow a better substantiating of the programmes by which these are promoted, yet keeping the diversity among the different categories of SMEs without triggering off market competition advantages which could lower the position of large and very large companies.

• promoting of some clearer and simpler methodologies for ceiling calculation − limit of small and medium-sized enterprises’ specific indicators in order not to misapply the advantages which these are offered by being taken over by large companies; the aim is to ensure an equal treatment to all of them ,but an appropriate one to the existent situations of all business types.

On such a basis, one can understand more clearly the contribution which the EU enterprise brings to the economic expansion, to ensuring employment, to international economic relations as well as to the way in which it can interact with the financial –banking and ensuring institutions, with the commodity free activities in the economy of each country providing better conditions for integrating any type of activities.

1. The universe of the enterprise in the European economy The enterprises within this integrationist area of 27 member countries form an

universe like a mosaic with segments of different sizes, colors, forms and other different features, each of them having its role and significance within the whole framework which they all build together. This universe, with all its peculiarities, is focused on a brief but fairly


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large defining. According to this, the enterprise is an independent economic entity, with business-lucrative purpose, licensed to operate within the boundary limit of the EU member countries and/or within the European economic area. This concept includes: sole proprietors, sole traders, family businesses, partnerships and profile organizations, small, medium-sized, large and very large economic units, private, public or joint property, individual or collective, national, foreign or multinational properties, entities which hold “stakes” in other entities within the limit that ensures their autonomy.

On the whole, the European enterprises have an essential role in ensuring the production of goods and services for the population and the economy in this part of the world and, not only; they represent the most important source of entrepreneurial skills, of innovation and employment places. In 2005, there were about 25 million such entities in the EU which ensured over 130 million jobs and three quarters of the 9653 billion Euro which represented the gross added value in that year.

According to the EU revised statistic classification, the contribution of different economic activities to the GAV of the year 2005 (EU-25) shows as follows:

• industrial activities (sections C-E) ……………20.6% • farming, hunting, forestry, fishing activities (sections A-B)… …………1.9% • constructions activities…………………………..21.7% • distribution activities, hotel-keeping, restaurants, coffee houses, trade, transport (section G-I)………………………………………21.7% • health care activities, education, other services and domestic activities

(sections L-P)….22.5% • financial-banking activities (sections J-K)…...27.14% Taking into account the great number of enterprises in the 27 countries and the fact

that they are extremely diversified, we shall tackle the noticing of this feature starting from the EU legal-statistical criteria.

The Legal- Statistical Defining of the Enterprises in the European Union

Table 1 Type of

Enterprise Number of personnel

Annual Turnover, (net) Euro

Total Assets Euro

Degree of autonomy

Micro 1-9 or <10 <2 million <2 million * Small 10-49 or <50 <10 million <10 million * Middle-sized 50-249 or <250 <50 million <43 million * FMM-SME <250 <50 million <43 million * Large and very large

250 and over <50 million and over <43 million and over

*

Note: the enterprise which holds less than 25% of the share capital or of the rights to

vote at another economic unit, and other economic unit holds less than 25% of the share capital or of the rights to vote at the respective enterprise.

1.Key figures on European business with a special feature section on SMEs, 2006 Edition

The EU-25 enterprise has an important role in the world trade as well. In 2004, they accounted for 19.2% in the world exports (exclusively the inter-community trade) and 19.1% of the import. They rank much higher in comparison to the enterprises in the USA whose exports reached only 12.6%, and a little more at imports in the respective year. Practically, the EU enterprises are able to export almost as much as all the units of this kind in China, Japan and Canada together.


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As far as the imports are concerned, the European enterprises range much below the level of those achieved by the USA firms which used to have their due of 22.2% of the world imports. Comparatively to those in China, Japan and Canada, considered together, the EU enterprises imported with one percent less.

In 2005, the EU -25 exports reached 994.6 billion Euro, and the imports got to 1078.9 billion Euro; the export coverage rate against imports reached 92.2% and it is incomparably greater than that achieved by the USA 2 enterprises.

From all these points of view, there are numerous differences among the enterprises of the EU member countries, in a more or less degree, and the differences would shoot up if we resorted to a comparative study on categories of enterprises and activities. Within the UE-25 framework, there are countries in which large and very large enterprises hold a special role, while in other countries, the small and medium-sized enterprises range at a high level. According to the EU statistics, in all the business fields, except the financial services, there is 69%, at least, of the employed workforce which is meant for 1 - 49-employee enterprises, and, on the whole, the small and medium-sized enterprises use, at least, 80% of the workforce.

The way in which employment is distributed on activities in the EU-25 member countries depends mostly on the nature of work. There are activities in which the enterprises need to be high-sized as the kind of work engaged within them requires it and it is only at a certain degree of concentration that they can become profitable. But there are also activities which can have successful results in certain small and medium-sized enterprises. Mining activities belong to the first category; at the level of EU-25 they are achieved in large enterprises which, in 2003, used to hold over 63% of the workforce employed in the branch. Electricity, gas and water distribution ranked very close to them. Communications and air transportation concentrate over 88% of the employees in large working in the respective branches and, especially, very large businesses. On the contrary, activities such as estate, car trade, restaurants and other trade activities take hold of the greatest part of workforce used in small and medium-sized enterprises.

Distribution of the Gross Added Value and of the personnel employed in the

non-financial business on categories of EU-25 enterprises Table 2

Type of enterprise Percentage in GVA Percentage in total personnel 1-9 workers 20.5% 29.5%

10-49 workers 19.1% 20.8% 50-249 workers 17.6% 16.5%

250 workers and over 42.7% 32.8% Source: Key figures on European business.., European Communities, 2006, p.42 Within the EU-25framework, there are, also, important differences between the way

in which various categories of enterprises take part in the creation of the gross added value and the personnel used, as one can notice from the figures mentioned above.

2 quoted source 2. Societas European, the European commercial enterprises In our country, and not only, the European enterprise has usually represented, not for

a long time, and it still continues representing an economic unit whose social headquarters is located in the European Union and it is spontaneously assigned a superior appreciation on different value scales as expression of the level of development reached by the countries


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which are members of this integrationist group. As opposed to this interpretation, when we talk about an European enterprise, in the past two or three years, the need has appeared for us the delimit, the interpretation, more strictly, the meaning which we should have in view as a result of the coming into being of the European commercial enterprise, the enterprise with a European multinational legislative framework which did not exist in the past. To express ourselves more suggestively, this firm is of European “nationality”. The legislations appropriate to each EU member country, more or less specified and differentiated among them, remain in force, but they should he applied to all the other enterprises which have not followed the procedure with a view to becoming European. We could say that the world of the EU enterprises exists and operates with two speeds - a European one (unique) and the other one national − European, more or less differentiated from one country to another.

First, we notice the multinational nature of this enterprise, its being born by means of a regulation at European level which does not have to be validated by the countries in which it was made up and/or it works. Besides this more or less formal legal and political aspect, the societas European multinational feature is of economic nature and it derives from the interest of all the EU member countries that the enterprises and their peoples should benefit from all the competitive advantages which may appear in the integration process thanks to this new type of enterprise which, otherwise, would be lost. But the Societas European has, also, a multinational character. The term multinational is frequently assigned there different meanings with the same cognitive value:

a) the capital of the firm comes from different countries and their participation is established by competitive processes specific to monetary-financial market, by commercial agreements etc, and if legal limits are imposed, the participants’ transaction is achieved within these limits;

b) the enterprise runs its business in several countries (but not necessarily in all the EU member countries);

c) there is no need for a concordance to exist between the countries providing the capital and the countries in which this enterprise carries out its activity, and neither a ratio as far as the business volume is concerned.

The Articles of Association of the European commercial organisation,as it was drawn up, is mentioned both in the Regulation 2157/2001 and in the Rule 2001/86/CE. It is important to mention that the Regulation text concerns directly the EU member countries which have to apply it at national level, and the one in the Rule has to be implemented by both the EU member states and those which do not belong to the European area and namely Norway, Iceland and Liechtenstein.

Taking into account the meanings which have been allotted to multi nationality and multinational in those regulations, the enterprises which carry out activities in several member countries can set up (establish) one Societas European. In the same way, enterprises from different countries can join and make up a societas European. Both the former and the latter can work only on the basis of one regulation.

Objections of different countries to these regulations: • it may bring about blocking due to political reasons which are independent of the project; • the fear that SE could avoid restrictions and protections which exist in the EU

member countries that have such situations. • Germany has a kind of “co-management” running of the enterprise which stipulates

establishing the supervising Committees of enterprises on a par with their representatives and employees. This is considered the ideal means of communication and co-working, but it may also be a source of blocking or of misunderstandings for foreign investors;

• the foundation of a fiscal system at European level for the SE implied very great compromises for some countries and especially for the those with high and small taxes.


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Peculiarities of SE: • it operates concurrently on the basis of the national and community regulations; • it is very useful to the large financial and non-financial groups, but less useful to the

small and medium-sized enterprises (SME) set up only in two member states; • it is less useful to the enterprises which carry out their activities only in one country

and the least useful for the very small ones (of district or town); • the community regulations do not comprise provisions referring to the taxation

system, competition, intellectual property or insolvency; • the instructions in the national law and community law, as well as the Articles of

Associations are appropriate only concerning those issues which are not tackled by the European Instruction on SE;

• it can move its registered head office from a EU member state to another one without being obliged to close down its existence in the state it leaves in order to set up in another state;

• in all the other EU states, except France, the SE can turn to good account the provisions of the taxation system legislation which enables it to compensate for the losses with the profits it gets in the subsidiaries based in different countries;

• it may came into being by transforming a joint-stock company, if the latter proves its European nature by having established, at least, one branch in another state for at least two years;

• any project of setting up such a company has to be achieved through negotiations with the representatives of the involved companies’ employees in order to bring into line the way of the employees’ organizing and involving in this concern. If an agreement is reached, its implementation becomes compulsory. If negotiations were held but no agreement has been reached, the so-called reference instructions are applied; they belong to the supplement to the Regulation and stipulate that, in all cases, the employees’ representatives have to be reported on and asked for advice by S.E. management board on the basis of written reports concerning the company’s prospects, its production, the employees’ condition and the likely evolution of employment, changes in the organizing and running of the company, mergers, cutting down of activities, closing down of subsidiaries, group licensing etc.;

• explicitly or implicitly, in the legal regulations of the member countries, each on its territory, provisions may be included by which the state provides opportunities for completing and/or adjusting some issues concerning the SE (management organizing, more efficient control over the capital, thanks to the preemption and agreement right; clauses of inalienable rights and of exclusion etc). In this view, France, as well as other countries, is concerned about making itself more attractive and competitive under transparency conditions and in compliance with the current standards of corporate governing;

• banking and ensuring institutions are obliged to up-date the prudential rules (especially the rate) and the accountancy rules specific to their activities.

Specifications: • SE is a company up from a minimum size. The size of its capital is given by the

minimum capital for a business established in each of the country where the company has subsidiaries;

• it is a joint-stock company involved in financial transactions; • it does not cover the whole European economy with commercial feature as there is a

great number of small and medium-sized and/or family economic businesses which have not become “European” by setting up subsidiaries in other member states, which carry out activities in national, regional-national or local environment and may or may not have import-export relations with companies from other EU member countries;


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• the SE project is criticized, especially, for the lack of a specific system, the deadlines which are excessively delayed and the lag-work in which the involved institutions block its development;

• on the whole, the project is positively appreciated as political progress which helps the EU to develop and it answers the expectations of the firms and of their employees as a start in tuning the field regulations among countries, among countries and the EU as a promoting element of competition among the EU countries in order to attract SE;

• the difficulty of the project consists in the way in which it distributes both the liberty and the framework, particularly, as it has proposed elaborating a consolidated taxation system, highly criticized by the Irish commissioner on this issue. At present, the SE could concentrate on Ireland, Luxemburg, Belgium, Austria and Switzerland due to smaller taxes and to other conveniences which these countries allow to foreign capitals.

3. Enterprise size. Derived features The enterprises size grant them features worth being taken into account because they

make them different for, at least, certain moments and periods. A lot of empirical research and studies carried out in enterprises of the European Union bear out this ascertained fact under several aspects.

According to them the small enterprises pay their employees less than the large ones. This correlation holds true for all types of enterprises.

Large enterprises employ the best qualified people and have a higher productivity as it can be noticed in the data shown by us in the previous section.

For the smaller-sized enterprises, the labor marginal productivity, the only pertinence for wages establishing, is often superior to that in large enterprises, but the factors’ global productivity is superior in the large-sized ones as against the smaller ones because large companies are more substantially capitalized than the smaller ones. However, the factors global productivity is smaller in small companies which are more slightly capitalized.

Employees are better protected in large companies thanks to the Trade Unions, but they are subject to some impersonal rules (behavior), they lose themselves in a large organization. That is why most of them are stressed.

Promotion in the large companies is not always closely related to the employee’s efficiency. The more personal character of the employee’s link provides greater advantages for promotion, but one must not exaggerate that many employees cannot stand a “merge” of the family life with the professional one.

Although the companies’ management boards are subtly trying to prevent their employees from enrolling in the Trade Unions, such strategies are increasing more or less depending on the regulations in force. “The Price” paid for a high degree of trade –unionism means higher wages. The phenomenon is specific to great enterprises as their management boards are made up of more professional employees and not of shareholders, and psychologically speaking, it is easier for them to accept this situation.

Explicit findings: • high wages cause constraints and restraints: the higher the wages the more strongly

felt is the licensing sanction for behavior un-permitted by the company; • the size of the enterprise has impact on supervising expenses; in small enterprises

,these are smaller; • in companies with high salaries, the candidates competition for getting a higher

position is sharper and their qualification is superior;


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• a large company which holds the monopoly position on a large market, in a great(and developed) country runs the risk of being objected to by the authorities which control the competition, while a small company which controls a small market segment, will not be objected by anyone or almost nobody will be against it.

• large state-owned enterprises (like nationally run units and locally run units) which hold a state monopoly can effectively impose racking princes or subsidies if they will not increase the price;

• the small enterprises have the possibility of directly estimating their employees’ qualities because they see them at work and are in direct touch with them. The great ones have to resort to expert appraisement and specialists in evaluation, which means additional costs, indirect and random knowledge. Smaller enterprises pay smaller wages because they estimate the employees better; they find out the real performance with less expenses;

• small enterprises direct the recruiting of their work force from the local small markets. On these markets, there is a poise wages for each trade, and this wage is accepted only at the limit. A small enterprise can employ the number of a persons they want, paying the required wages without disturbing the equilibrium (because the demand is small). A large company overturns this equilibrium (great demand), and consequently, it has to accept higher wages in order to find the required number of employees with the necessary qualification. If the enterprise is great as against the targeted market and it has to urge work applicants to come from abroad and settle down in that area, it, also, has to assume the psychological and material costs incurred by the employees;

• smaller enterprises have a grater rate of growth, especially, when they are newly set up but, at the same time they have an increased risk of bankruptcy in comparison with great companies;

• any increase engenders a risk for the enterprise as it triggers off a permanent increase of the capital for financing the additional plants and a greater working capital. That is why the company needs access to suitable financing sources. Since the middle-sized companies develop more, they will be more liable to risk on the financial market than the others. Large companies have access on this market but the small ones need public help;

• since the small and medium- sized enterprises pay smaller wages than the big enterprises, the workforce employment within the former enterprises is less stable than in the latter. The jobs are also less stable in the small and medium sized enterprises.

Motivations: • the strategic behavior of the employees who look for better paid jobs, better working

conditions, better location; the enterprises employ and dismiss repeatedly according to their needs; the one who leaves a great company can hardly find a job; the employees’ average age in an enterprise increases commensurate with its size; young people change their working place more often than the middle aged; family commitments represent serious reasons, possession of a house, all this decreases the turnover of labor, the geographic mobility and hence that among enterprises.

• there is a behavior of employees: the first jobs are often in small enterprises because the great ones require conditions of graduation degree and professional experience. The best educated candidates look for a job in a great company from the very beginning and avoid the small enterprise. In addition, the job in the great enterprise is more stable and offers high possibilities of making a career;

• those who do not graduate from a higher education college seldom get to have a job in a great company unless they have worked in one or several smaller companies. Experience acquired in a smaller company is not a guarantee for success, though;

• in the great company, the salary does not help you make a fortune, but it is an opportunity for one to make a career. In order to make a fortune, the best way is to have your own business;


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• in the smaller enterprises, the absenteeism is little, while in the large ones, it is higher. The absenteeism, also, differs depending on the type of work and sex. Workers can be absent from work more often than those working in administration because they are more liable to certain diseases than those who work in offices. The office workers, in the smaller enterprises especially, are few and for this reason they rarely absent from work but also from another reason, namely because it is only their task to carry out the previous work assigned to them when they resume their activity;

• small enterprises bring their contribution to innovation in a smaller degree than the great companies; the problem is the research- development budget;

• great companies have access to the capital market more easily in order to finance themselves and can afford to wait for results longer. The results in research are randomly; it is hard for the new products to be achieved and they may not be successful. While working, the great company sells more, the turnover increases and this enables it to merge with other companies.

• the share of research expenses in the turnover of the smaller enterprises is smaller than in the great ones. Large companies aim at another economic indicator − the share of the new products output in the turnover.

• the size of the enterprise greatly influences its exports, its international relationships. If the product shows quality, originality, special features, the small enterprise can export relatively easily. When the after sales service is more complicated, it is necessary that the small enterprise should require the importer’s help, and in the case of a service network, the requirements are greater, as this kind of enterprise cannot cope with the situation by itself. The share of exports is lower in smaller enterprises or they do not have export activities. The new informatics and communication technologies (NICT) enable small enterprises to have exports because the communication costs are much diminished, but the good effects delay in making themselves evident due to other causes;

• in all countries, the small and medium-sized enterprises are not suitable for establishing of employees’ trade unions, either because of the employers’ strategy or because of the lack in persuading the employees;

• it is due to the wages which are smaller than those in the large companies, that the increase in number of the small and medium-sized enterprises in a country is associated with a rise of discrepancies in incomes and wealth;

• countries which abandon the attention and the assistance which should be lent to the small and medium-sized enterprises will sooner or later be faced with significant and long-term unemployment.

Undoubtedly, the empirical research confirm that there are still other differences among the developing enterprises closely related to their size, differences which can render obvious the advantages and disadvantages of the different types belonging to the multitude of economic units in the European Union.

4. Are the European Union enterprises as productive as those in the USA or

those in other developed countries?

The partial and, up to a certain extent, indirect information about the productivity comparability of the two categories of enterprises is to be found in the first section of this paper. The issue is about GDP, about the share of the EU institutional sections in GAV alongside their share within the entire employed workforce etc. With a similar significance, we could add the size ratio which is convenient for the businesses in the European countries in their export-import relations with companies from the USA but also with enterprises from all over the world.


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Referring to the comparability of the productive prospective among countries which resort to GDP per inhabitant, per one employed person or per one hour of work, certain measures of precaution become imperative, as such indicators in which GDP is involved do not fairly reveal the standard of living which has a richer and much complex structure. In addition, we must take into account that the calculations result may be strongly influenced, in a positive or negative way, by the structure of the population on age groups, especially by the number of those with ages from 1 to 25 years old and of those from45 years older. It is very likely that the number of those in the first group should be very high, and that those over 16 of 17 up to 25 years old should work in a slight proportion. The situation might be similar for those over 45 years old. A great number of people who do not belong to either of the groups would diminish the GDP per inhabitant and per employed person and vice versa.

The issue of the ratio between productivity in the EU and the USA is of importance because productivity causes the increase of GDP and, by means of it, the standard of living ,and the economy’ s potential rise too, although these relations are not always linear and direct.

The USA, obviously, represents the most industrialized country with the highest GDP per inhabitant (except for Ireland and Norway which have some special conditions). The level of GDP per inhabitant in the EU is smaller than in the USA. But the situation changes, in a way, if we consider GDP as against the number of working hours. In his work “ Productivity and Increase in Europe and in the United States “ (Editions La De’converte,2007), Gilber Cette reveals that eight of the EU member countries are closest to the level of the United States as far as the hourly productivity is concerned: France, Germany, Great Britain, Austria, Belgium, Denmark, Holland, Ireland and Norway. The average in the EU-12 area is 82.7 as against 100 in the USA. The conclusion the author reaches is very clear: as far as France is 6.7 points above the USA ,and Germany alongside other six countries have between 1.4 and 5.5 points to catch up with the American giant: “the technological border” among them has a high degree of relativity and the position of the American companies as indisputable leader is obviously loosening. Catching up with the world number one is possible in a relatively short time period in comparison with situations which existed in previous decades when this hope would have been considered an Utopia.

GDP per inhabitant, productivity and workforce employement Table 3

Employment rate and work duration in 2005

GDP per inhabitant and productivity in 2005 Employment rate in %

Working hours

per year

Share of partial

employment %

Hourly, structural

productivity in % from the USA income

GDP per

inhabitant GDP per

employed person

GDP per hour-work

15-64 years

15-24 years

65-64 years

Germany 71.4 78.2 98.6 65.5 42.6 45.5 1435 21.8 87.7 Canada 78.7 76.8 78.3 72.5 57.8 54.8 1737 18.3 77.3 USA 100.0 100.0 100.0 71.5 53.9 60.8 1804 12.8 100 France 76.2 88.7 106.7 62.3 26.0 40.7 1535 13.6 96.6 Italy 68.6 76.9 87.3 57.5 25.5 31.4 1791 14.,7 80.7 Japan 74.6 71.5 74.3 69.3 40.9 63.9 1775 25.8 72.7 Great Britain 78.4 79.2 88.9 72.6 58.1 56.8 1672 23.6 86.5 Euro-12 area 71.5 78.1 90.6 63.6 36.8 41.3 1609 17.0 82.7 EU-25 67.0 73.3 81.6 64.0 36.8 42.4 1664 16.8 75.1

Source: after Alternatives Economiques Nr.260/2007. The mentioned data allow us to conclude, at the same time, that in the European

countries under discussion, there is a certain contrast, or better said, a slightly noticeable


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discrepancy between the high hourly productivity and the slightly smaller GDP per inhabitant which can be mainly put down to either a smaller workforce employment rate or to the shorter duration of the work, or to both causes considered together. Theoretically and practically, the explanation of these causes may have the roots in the smaller general duration, but also in an increased rate of part-time employed population. Another side of this explanation is represented by the rate of decreased employment for the active population, or high unemployment. In such a situation, it becomes utterly important for us to know the causes which act in the signaled direction. From a logical point of view and depending on the real aspects in the respective European countries, it is obvious that the situation might be put down to: custom or the collective trend, social preference for a reduced working schedule; some regulations adopted with a view of increasing the number of employed population because, at a given level of development with an able-to-work population which is numerous as against the economy’s potential, there may work more people only if everyone works less; the high degree of the fiscal system which is applied to incomes; expelling of those who are hardly efficient.

But the reality is more complex and, if it is closely studied, we can notice that the rate of people employed in economy has a great importance in reaching a certain level of productivity. A longer working week does not necessarily mean a proper increase of production because any additional working hour is less efficient than the previous ones. Within the framework of this process, a great influence is borne by the young employed population whose productivity in the EU records a notable écarté in comparison with the USA. Only the most efficient applicants find jobs quickly, and another important part of young people can hardly be employed or they are simply refused any employment. Such situations diminish the European Union productivity and confirms the objections expressed above, especially those related to the calculation of GDP per inhabitant as an expression of productivity. The employment of young people in the EU member countries is, generally, under the level of that in the USA, but a more significant difference of at least 15 points is known in Belgium, France, Greece, Italy and Portugal. This phenomenon is, also, present among the middle aged people. In this respect, the lag of at least 15 points as against the situation in the USA can be noticed in Germany, Austria, Belgium, Spain, France, Greece, Italy and Holland.1. Productivity diminishing at this age category can be explained by the loss of human capital due to longer and more repeated unemployment periods. The employed ones “preserve” their human capital or they even enhance it.

The same analyst, who we have already referred to, maintains that “…the relatively good performances of many European countries as opposed to the USA, as far as the hourly productivity is concerned, does not reveal Europe’s technological advance, but on the contrary, it shows a weak engagement of the workforce”(1). In support of this conclusion, the following arguments are brought: the average working period in EU is shorter; employment is particularly focused on the most productive active people; the less productive ones − especially the young people and women remain out of work casually or deliberately. Moreover, the conclusion becomes as logical as possible, that in case the working time period and the share of the employed rose in the EU member countries, the level of GDP will unavoidably increase, but a relative diminishing of the hourly productivity will take place.

Referring to the position of the EU enterprises in comparison with those in Canada and Japan concerning productivity, one could draw the conclusion that, on the whole, the “ European “ enterprises are more efficient and competitive. The EU-12 enterprises are superior to those in Canada at all four indicators taken as basis of comparison, but the in the case of EU-25, this superiority is diminished only at two of the indicators, the lagging behind being obvious in the GDP per inhabitant, though − which is less representative as far as productivity is concerned. It is interesting that EU-25, though marked by an even greater


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lagging behind in GDP per inhabitant, achieves a slight superior level at GDP per place of work, and it is much ahead of Japan at productivity per working hour.

Among the EU member countries, France, Germany, Great Britain and Italy, as one can see from the shown data, complain, in a lesser or greater degree, of the same drawback which is specific to EU- 25, that is, the achievement of a GDP per inhabitant under the level of that in Canada and Japan. The lowest level is in Italy. At the same time, it must be noticed that concerning the GDP per place of work and per working hour, all the four European countries rank on positions which are superior to both Canada and Japan. We have to add that, concerning the productivity calculated as GDP per working hour, France proves to have even better results than the USA (106 points as against 100 of the USA).

The explanations of such a hierarchy of the EU enterprises and of the countries dealt with in the comparative study of productivity generally belong to the already mentioned phenomena and process which prove to be characteristic of all the countries in this area of the world and for whose overcoming it is necessary a long period of time.

Obviously, it is possible that, for certain indicators used in this study, the EU and different member countries of it may rank better or, why not worse than other countries which were approached in this study.

At the same time, cautions may be expressed concerning the cognitive value of the mentioned indicators, referring both to their intensity, which is significant in terms of the content, and the way of reckoning. No matter how many drawbacks one might signal out related to this analysis attempt, it remains obvious that the result we have reached cannot be overlooked, that it has not only theoretical but also operational significance that one might resort to its conclusions quite trustworthily if we have in view that other attempts have been more worthless and yet they were taken into consideration being given an importance which was out of proportion as against what they had offered.

Note

(1) Alternatives Economiques Nr.260/2007, p.77


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THE LAST “REVOLUTION” ON TRANSPORTATION

Ilie ROTARIU Ph. D. Lecturer

“Lucian Blaga” University of Sibiu Abstract. the mass cars’ production is the key of nowadays’ development. The new

economy based on computers’ revolution has afforded the expansion of cheep transportation. A new economy has arisen: the leisure economy, but only for the developed countries. The last decade China has joined the world: one of its tremendous fields of production is the huge cars mass production that can not be supported by the environment. A social impact must be solved: who will tell the Chinese they can not afford their own car.

Key words: mass media; tourism; sustainability. REL Classification: 18A;

To start this ideas on the latest spirit of the “tourism” I cote, some “myths” and “realities” of nowadays tourism (Cooper, 1998: pp.23): Myth: most of the tourism is international. Reality: 80% of the travels are inside the home country. Myth: the majority of the tourists travel by planes. Reality: the majority of the travels are land ones, average distance is 65 miles. Myth: the work in tourism provides opportunities to travel and lean foreign languages. Reality: almost of the staff in tourism works in hospitality and has no contact with the tourists.

We can find out that unexplored area might bring dramatic surprises! We can already discern that the two restrictions for practicing tourism – mass tourism – known as time disposal and money availability might be a myth too.

We can prove it by analyzing the development of leisure sector in US. At the century’s beginning, Henry Ford was looking for a solution to turn profitable his business: cars’ construction. But, because of valueless wages of the American working class, he could not reach that minimal level, that production and critical number of units that could afford a successful business. It is Ford’s decision to increase his own workers’ wages that have changed, in our opinion, the entire world’s economic system. Ford has started a process that has developed as a boule de neige: it has afforded the Americans to live over their income, as it was appreciated as normal in the former economic system.

If you would sheet with attention the press between wars you will find out that, the leaders that acceded to the power before the 2 nd WW, rely their speeches on the revanchist matters but also on promises for a better life. In the middle of the crises they arrived to determine the economic relaunching. Either it is about Hitler, Mussolini or Churchill everyone promised and realized a better life standard that that one before the crises. After the 2 nd WW, first for the winning powers the “great modern migration” named tourism, mass tourism, has started. At the beginning modest, with 24 millions in 1950 till 100 millions in the 6 th decade. Marshal Plan has had a hidden social component. For the


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average German it said: fist a bicycle, than a house, than holidays abroad. Starting with the 6 th decade the defeated countries get also into the world of tourism.

All these show us that tourism is an important sector of the world economy. And more, the “derived” effect of this activity, the psychological one upon the population named tourists and that one named tourism workers is, may be, more important that the economic results. But we have to point out qui prodest? The statement that globalization is restricted by the communication and transportation is validated for tourism, too?

When talking about mass tourism we assume its dimension and democratic character that allow the access to a better life for a large number of populations. But the analyze of regional tourist flows relieve that tourism is not for everyone. Either we refer to outgoing – that is the social effect of reword for the population of issuing countries – or to incoming – that is the impulse given to the economy of receiving countries.

The start of the “tourism industry” was the Ford decision to rise the wages of its workers in order to sell its cars and boost its profits. Not the touchable side of the transportation but the effect of it. The last decade was one of tremendous changes that we call progress. New discoveries have boosted the world economies. We talk more about globalization as a compulsory way of daily life. The most surprising turn over seams to be the “waken up” of Asia. For centuries, we the Europeans have considered that the world development hang on us. Last century America (The US) has taken the leading, but as the American are of European origin we have kept the idea that we are the center of the world: all major discoveries have a European origin or background. Last years we notice a new trend: Asia get the initiative: we ignore Japan and its economic miracle as it has not changed the world power balance. We cote China and India whose populations are not the majority of the world population, but whose economies are on the point to impose their rules to the world. China is not only the workshop of the world but its GIP is on the point to over cross the US’s.

The perspective that China will get the some economic level as Western developed economies rise a question: is the world capable to conserve the earth? The ever higher pollution in China’s area might break the thin ecologic equilibrium. To point out, Romania has just celebrated the production of its 3 million Dacia car: it need 17 years to produce the first million, an other 14 to produce the second million and 10 for the third one. China has produce one million cars in less than nine months!

The process is longer and has the roots in the American way of producing, starting with Ford. Today we can see its result when the “financial and invisible products” are the majority of the value of the nations’ economy, mainly of the developed ones. The simplicity, or may be the lack of profoundness of almost of the Americans, whose life relies on exclusive power of money, has determined them to adopt a new faith (near that brought by Pilgrim Fathers – the liberty of human being) and a new God: the Car. The highways have covered the US in order to satisfy the fretting and the restlessness of that people of immigrants, their nomad spirit and have subordinated the hole economy and development to the new God. The uninhabited space of America could thus, since then, easily and democratically be traveled, even by the working class. All along the highways quickly have issued hotels, motels, restaurants, entertainment facilities, etc. Not for the rich people – that have kept staying closed in their world – but for the crowd. Quantity bring small profits but many of them. And, as the desire to have more is in Americans’ blood the consolidations have started: hotels, restaurants, services etc. brands (chains) have appeared. And all BIG, huge, gigantic and in expansion all the time. We have to point out that every one of these giants has its own philosophy (coming from that one of the successful owner). After the second WW the borders of US were “blown out”. Their philosophy, capitals and ways of management have spread out in the whole world for new profits. Globalization has started,


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by a special arrangement of people’ travel. This is the way that, unexpected, the American working class was put to entertain itself: simply, in order to assure the critical mass of a profitable production for Ford and his’. In fact in order to increase the present profits even during its free time. Long later, after the 2 nd WW this conception has found a democratic expression and mass media brought its humanist dimension. Tourism, as that is the way this use of the free time is known, will become the forerunner, the model and the promoter of globalization.

The next moment, that we can also remark in Great Britain, is that one of the exigency of reconverting the flight industries from the war to civil production. In this sector huge capitals and a special labor force have been concentrated and have to be protected for and during the Cold War. In almost of the situations it is clear that the costs of a flight can not be covered only by flight tickets’ income. Let’s count: the costs to over flight several countries, over several borders, the repayment of the infrastructure, of planes, then the “small” costs with fuel, wages etc. the reservation’ systems etc. And yet, anyone knows that a charter flight is cheap. And yet, planes are flying, tourists, businessmen etc. fill the world. HOW? Using the same principle of Ford, but in a retrograde sense: paying of the large bourse of the state, that is it is subsidized as much as it is needed, but still with the crowd money. And, flying over the borders of Great Britain or US (the main producers after the WW) we have to involve several countries. Politically, (by agreements) the same opportunities were built for all of them, as it was done for the developed countries. Economically, the profits were globalized by a declared better distribution of the costs and the opportunities.

The microelectronics and the biotechnologies have separated the socialist system from the capitalist one and segregate the first one. This was and still is crucial. Let me explain it by an example: Holland has obtained near half of its territory from the sea. They cultivate about a quarter of the potential land. 3.5% of the population is feeding the whole population and make also exports. About 10-12 % of the population is manufacturing the goods and produces all the merchandises required on the market. As a result, the majority of the population might be considered as throwaway for production, valuable only as consumers. They were near 45% working in the agriculture: what happened with them? If we subtract the children, pupils, students and pensioners it remains some 60% that work in the new economy, the services of nowadays generation, the post-modern invisible one. Moreover, it might be a menace for the society if it does not manage fruitfully its resulted “free time”. To “keep peace under the olives” the new post-industrial societies have had to develop the “management of the disposal time” that has turn on the course of the tourism from 3S (sand, sun, sea for crowds of people) to 3E (Excitement, Entertainment, Education for crowds of people too!), and further more to the life style concept that was extended over the hole individual and social life, not only its economic side.

The new economy is in Hans van der Loo of Samhoud Service Management – Holland’s view the result of passage from PRODUCT => SERVICES=> EXPERIENCES. He distinguishes an American way versus a European way of interpretation of the “experiences”. According to the American way (Devenport, Beck, 1999) the experiences are the new modern religion, “the cathedral of consume”, the new hard currency of the businesses. As these concepts are known in informed media we shell just insert a visual schema of commoditization of the economy, that illustrate the evolution of the real economy (not the economic theory and mainly the economics).


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Figure 1. Real economy evolution To make my view much clear: merchandise is a good I have trade for its utility. When

this merchandise is more sophisticated, like a wash machine it becomes a product. A car is even more: I need gas pomp, a service to repair, insurances etc. that means I need services, values that I can not touch but worse money. In time, services become distinct domains, independent of the matter. One special merchandise has risen immensely and in a special way: money, as we have already shown. When the raw materials fail to lack, the new economy reduce their quantity and upraised their quality. Simultaneously, as we shall explain further on about new tourism, in order to give occupation to the grown population gifted with free time it was compulsory to put value (in order to create the source of the profit) on the consummation, of the time of consuming and the feeling the user experiences. Water will be sold no more for its utility; still water will be sold for the please of drinking still water and sparkling water for the pleasure of drinking sparking water - it is obvious that having thirsty is compulsory, but as water is abundant, easy and all over available the merchandise water seams to be mean - and - value - less without the “experience”, that is the final result of a long, hard and costly process of “education” of the population, that is the consumers. Next stage: I am interested to see which way the consumption of still water will transform my buyer and mainly what will be the differences between those drinking and experiencing still water and those trying sparking water. The purpose: we might suppose, that in order to add value, thus profits, the businessmen can predict the reaction and the evolution of the consumers. This information will help them to cut the costs and might allow them to sell to the buyers a “controllable future appearance or way of life, finally of happiness” that is an efficient entropy. Future will tell us soon.

Such a theory is valid, naturally only in the developed countries enjoying large accumulations, that ones that are the generators of the globalization too. Some of the rest of the world can be attached using the utilities that become available and fit to their possibilities.

There are theories that state that in the new economy the nations arrived to be so interdependent that the desire to fight one the other slow down. “Commerce, not the military force is the way to power” – said Bill Clinton. (Bush has changed the opinion because? of the terrorism). The major conflict, in a unipolar world is replaced by niche wars (local wars) that have led to changing the type of economy. Since recently the civil and military activity (production, or selling etc.) were separately. Now, the global giants like to have on the same line and in the same order both of them: military AND commercial products. In fact, the military and civil teaching system has already approached their curricula but mainly their syllabus. (even if not admitted and checked)


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We can not deny the right of people to look for a better life. The field researches carried out in China has shown clearly that the young Chinese do not imagine their life without the usual commodities of a modern life in a developed country. It is a normal attitude of common people. The position of politicians and businessmen are similar: they understand to take advantage of the opportunities that the last years have brought in. Their economy is providing good results even if it is a mass production and old fashion comparing with the Western ones. A postmodern economy supposes large accumulations that might allow a new production system that means a new lifestyle. China has to spare it to come at this level: even short in resources, mainly in oil it find convenient to follow the well-known way the developed countries have experienced.

The deep force that leads the Chinese politicians and businessmen is the European idea of making as much as possible of profit: since 17 th century the new “capitalists” have put into the center of their way of life not the goal to provide the necessary goods to live but the imperative demand to realize the most of profit – as Max Weber has pointed out. This ideas planted into China has led to a new Chinese philosophy; they “awaked” a part of the population and gifted it with the desire of HAVING in a Western way. The faster way to reach the Western lifestyle is mass production, the transformation of China into the world’s workshop and a powerful system of production that has a large and huge demand to fulfill during a couples of years: the new desire for a better life spreads into larger China’s population and offer a safe market at least for some decades.

The costs are unthinkable: to stay on our example about car production, the pollution will be unacceptable: a speed development of car’s production may lead to some hundreds of millions of cars in a couple of years that will not be supported by local environment. What is to be done? A new fuel might be the solution, but who will cover the costs for the conversion when the Western countries, including US kept going on oil?

For technical reason someone has to tell the Chinese that they are not allowed to have their own car. Or find a way to discuss the future. As the future depends on numbers: the numbers of people that can be supported by the nowadays production system. It is only one option: to change the production system, in fact the whole world as we know today.

Bibliography

Barry R.J., „Globalisation and interference in the international political economy”, Pinter Publisher, 1995

Bray R., “Flight to the sun – the story of the holiday revolution”, London: Continuum 2001 Breton Th., “La dimension invisible”, Ed. Odile Jacob, Paris, 1994 Cooper Ch., “Tourism – principles and practice “, Logman, 2005 Cristureanu C., “Economia imaterialului: transzacţiile internaţionale cu servicii”, Ed. All

Beck, Bucureşti, 1999 Davidson R., "Tourism", Pitman Publishing, London, 1991 Devenport T. H.; Beck J. C. -“The Attention Economy”, Harvard Business School Press,

2001 Klidas A.K., „Employee empowerment in the European hotel industry: meaning, process

and cultural relativity”, ATLAS Nes. nr. 25 Meethan K., „Tourism in global society – place, culture, consumption”, Palgrave, 2001 Richards G., „Mobility in the European Tourism Sector: the role of transparency and

recognition of vocational qualifications”, CEDEFOB Panorama series 3, Luxembourg: Office for Officila Publication of the European Communities, 2001


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Rotariu, I., Globalizare si turism, Continent Sibiu, 2004 Slaughter M. Swagel P., „Does globalization lower wages and export jobs”, FMI -

Economic Issues nr. 11, 1997 Tribe, J., “The economics of Leisure and Tourism”, Butterworth Heinemann, Oxford, 1999

Journal of Leisure research – series 2005-2007 International Journal of Tourism Research – series 2007 Tourism Hospitality – continuum: in www.continuunbooks.com Tourism and hospitality Planning & Development www.tandf.co.uk/journals http://www.autoalliance.org http://www.academicmind.com http://www.china-embassy.org/eng/gyzg/t288374.htm http://www.oica.net/htdocs/statistics/tableaux2006/Ranking06-2.pdf


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CERTAIN THEORETICAL ASPECTS REGARDING THE USE OF THE DYNAMIC SERIES

FOR ECONOMIC ANALYSIS

Constantin ANGHELACHE Ph. D. Professor

ARTIFEX University Bucharest Constantin MITRUŢ


Abstract. The socio-economic statistics is studying the social phenomena and processes ovr their continuous development, aiming to learn about the concrete way they are changing from one to another given stage. When proceeding to the actual analysis of the phenomena development over the time, the statistics is using as main instrument of research, the indicators obtained out of the processing and statistical adjustment of the chronological series, in order to get a knowledge on their evolution over the past periods and, on this basis, to issue predictions on their future evolution.

Key words: statistics; chronological series; variability; aleatory; prediction.

1. Introductory elements The chronological series is formed by two rows of parallel data, of which the first one

is showing the time variation of the characteristic while the second one is showing the variation of the phenomenon or the characteristic being analyzed, from one time unit to another. As already pointed out previously, the chronological series are also know as time series or dynamic series.

When analyzing the chronological series, it is required to take into consideration a number of their properties. They are characterized by: variability, homogeneity and interdependence of the terms they are including.

The variability of one chronological series terms is resulting out of the fact that each term is obtained out of centralizing individual data of different levels of development. The existence of different individual data is explained by the fact that, besides the essential, determinant causes of the social phenomena, there is also the action of a large enough number of non-essential causes, some of them having an aleatory character, which mode of getting associated may change from one period to another.

It is well-know that to the extent that the action of the aleatory factors is stronger, the variation within the collectivity is higher while their influence is imprinted to a larger extent on the way the phenomena are shown themselves over each period.


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In addition, when analyzing a chronological series it is necessary to consider also the fact that they are drawn up for complex units, at which level the degree of the indicators variation is much bigger than in the case of the simple units, as they are comprising the structure variations from one time unit to another.

Having in mind this feature, when analyzing a chronological series it is necessary to measure both the degree and the form of the influence of the essential factors, which are imprinting a certain law of development to the phenomena, expressed as a long or a short tendency, as well as the degree of deviation from the general tendency resulting out of the influence of the non-essential factors, of an aleatory character.

The homogeneity of the terms is to be understood in the sense of the fact that within the same series there are only phenomena of the same kind, resulting out of the action of the same laws, which may be inserted.

This fact implies that, for each and every research, there is a checking-up to be done on the extent the data are homogenous between them and, consequently, they may be inserted within the same statistical series.

In order to secure the homogeneity of the statistical data included within a dynamic series, it is necessary to take into consideration the settlement of certain issues connected with both the for of expression and the content of the indicators. Thus, considering the first aspect, it will be necessary to let the indicators included within the same chronological series be expressed in the same measurement units while as for the indicators being calculated value wise it is necessary to take into account also the price changes occurring from one period to another.

However, it is doubtless that the issue of the homogeneity of a dynamic series indicators may be settled only to the extent the second aspect is taken into account, namely to make sure that they have a similar content. In the statistical practice, this issue is settled by comparing the data meant to be included within the same series, from the point of view of both, the gathering and the processing of the statistical information.

Another characteristic feature of the dynamic series consists of the periodicity of the terms which are forming the series. As it is well-known, each phenomenon is objectively linked to certain specific conditions in time and space.

The choice of the time unit to which the data of one chronological series are referring to, must be done depending on the purpose of the research, the content and the possibilities of measuring each indicator. For instance, the industrial production may be considered both in smaller time units (day, decade, month) and bigger time units (quarter, half-year, year) while the total agricultural production may not be considered otherwise than full years (either agricultural or calendar year). By elements of calculation, the agricultural production may however be surveyed over shorter periods as well. Meantime, there are situation when certain characteristics are influenced as to their variation by seasons changing, in other worlds, there are phenomena of a seasonal character which may occur (monthly or quarterly).

This form of phenomena showing themselves over the time requires the study of the phenomena periodicity and the construction of the dynamic series depending on this particularity.

In respect of the time characteristic, there is not only the issue of choosing the time units to which each indicator refers to, but also the problem of choosing the entire stage for each the data are presented. This means that, before proceeding to the series construction, it is necessary to make an analysis of the conditions under which the phenomenon developed, which should allow to have a knowledge on the stage within which the alterations occurring during its evolution. In this respect, the choice of the first year – the basic year- is of a


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particular significance, as the dimension of the indicators thus obtained by processing the data would depend exactly on the level of this term.

In the case of an enterprise, it is necessary to analyze the series built up on the basis of the years during which there have been changes as regards the organizational structure of the production process and labour process and, depending on the respective period, the dynamics of the various indicators should be interpreted.

The interdependence of the terms of a chronological series occurs as a result of observing the principle of the time and space unity: the indicators being shown are successive values of the same phenomena recorded at the level of the same territorial or administrative unit. This will lead to the situation in which the value of each indicator depends on a certain extent on the value of the previous indicator, reflecting the fact that the social and economic phenomena are the result of objective laws, acting as a tendency which may be followed up over a larger period of time.

That is why, in the case of the chronological series - given the interdependence between the terms- there is the issue which arises, as to knowing the line (curve) of tendency typical for each stage of development which, in a statistical sense, is expressing in a quantitative form, the very action of the law which generated them.

By taking into account all these particularities, the statistical analysis of the chronological series has to underline on a system of indicators which to characterize the multiple quantitative relationships inside the series and all over the period the data are referring to.

2. Typology of the chronological series When presenting the phenomena in their dynamics, there are several types of

chronological series which may be met. Classifying the chronological series is depending on the mode of expression of the indicators and on mode of expression of the time the data are referring to.

Depending on the mode of expressing the indicators the series is formed of, the chronological series are classified as follows:

• Chronological series formed of absolute indicators; • Chronological series formed of relative indicators; • Chronological series formed of average indicators.

The chronological series formed of absolute indicators are representing the basic

form of the chronological series. On the basis of the data of a chronological series formed of absolute indicators, we can obtain the generalizing indicators over the entire period. These statistical series are obtained through the operation of centralizing the statistical data for each unit of time.

The chronological series formed of relative indicators are representing a mean of representing derived values, calculated either as relative values of dynamics or as relative values of coordination or as relative values of structure or of intensity. These may be expressed either by concrete measurement units or as a percentage form. Irrespectively the form of expressing the indicators of which the series is formed of, in the case of the relative values it is compulsory to specify, either within the title or outside the table, which is the basis of reference in order to allow a correct interpretation of the data. For instance, if we are dealing with relative values of dynamics, we have to specify which is the period being considered as reference basis or, if there are structure values we are dealing with, which is the volume of the collectivity against which the specific weights being shown have been obtained.


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The chronological series formed of average values are used as a way of presenting the development of certain qualitative characteristics which appear as average categories: the labour productivity, the average yield, the average crop per hectare; the average wage etc. This kind of series is also used for certain quantitative characteristics any time they must be included in the analysis of phenomena which are supposed to arise within an interval of time such as, for instance: the annual average value of the social capital; the average number of personnel etc. The characteristic of these series consists of the fact that they may keep on being subject of further statistical processing aiming to obtain other derived indicators, allowing the form of their evolution to be characterized similar to those formed of absolute indicators.

The chronological series of data may be also classified depending on the time the data are referring to:

• Chronological series of intervals (periods) of time, known also as chronological series of flows;

• Chronological series of moments, known also as stock series. The chronological series of intervals (periods of time or periods of flows) are

statistical series in which each indicator represents the outcome of a socio-economic process over each period of time being used for the shown data.

Such series can be found out in the case of showing the evolution of the production and goods circulation, the investment dimension, the number of passengers being transported by the public conveyance means, the data concerning the natural movement of the population etc. They are drawn up for the indicators which can be added over a certain period of time which generate the periodicity of the presentation of the series terms. The terms of a series of intervals can be cumulated obtaining thus a totalizing indicator for the whole series. The periodicity of inserting the terms of a series of intervals may also change. For instance, when showing the data for the year quarters over a period of five years, by cumulating four terms at once we pass from a quarterly periodicity to an annual periodicity, by reducing the number of the terms from 20 in the case of the first series, to 5 in the case of the second one.

The chronological (dynamic) series of moments or of stocks, are those series in which each indicator is characterizing the size reached by the forecasted characteristic or the volume of the collectivity, by the time of the calculation: for instance, the installed power, expressed in thousands of kW, by the end of each year. These series are drawn up for statistical variables which can be added at any time. That is why there are series of moments with even or uneven intervals between the terms, which may be found out.

A characteristic of the series of moments consists of the fact that its terms cannot be cumulated in order to get a totalizing statistical indicator over the whole period, as in the case of the series of intervals, since they might comprise repeated recordings. In this case characterizing the level which has been reached over the entire period is not possible but on the basis of an average indicator only.

The purpose of the analysis of the data included by a chronological might consist of the fact that it allows us to characterize the way in which the social and economic phenomena developed over an expired period aiming to extrapolate afterwards the statistical data for substantiating the different data for prognosis. In order to achieve such a goal, it is necessary to settle the following problems which help the dynamics of the phenomena being statistically interpreted:

• Drawing up a chronological series; • Processing the data of a chronological series in order to get the system of statistical

indicators, as absolute, relative or average values, which is characterizing, on an overall basis, the series or its inner relationships;


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• Establishing the long and the short time tendency, which is obtained by applying the proceedings of adjustment to the terms of a chronological series depending on the time factor;

• Establishing the cyclical evolution of the phenomenon; • Establishing the degree of influence of the seasonal wave in the case that the

phenomena making the subject of the statistical analysis are affected by the seasons changes;

• Establishing the probable values for the stage to come, by extrapolating the series of statistical data already processed.

Figure 1. Scheme of a chronological series analysis

Elaborating the chronological series Graphical representation of the chronological series

Statistical processing of the chronological series

- Increases (decreases) of fixed and

chained basis - Indices of dynamics of fixed and

chained basis - Rhythms of dynamics of fixed and

chained basis -Absolute value of a precentage of

increase (decrease) - Average value of the series - Average value of the index and of the

average rhythm of dynamics -Indicators of variation and asymmetry

Adjustment of the chronological series by:

- average progress - average index - the smallest squares

method - checking up the

significance of the adjustment equations

Calculating the seasonality

- seasonality indices without eliminating the long term tendency

- seasonality indices with eliminating the long term tendency

Statistical substantiation of the prognosis calculations

-keeping the same forms and the same quantitative relationships -keeping the form but changing the quantitative relationships -using the correlation between the parallel interdependent chronological series


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Bibliography Biji, M., Biji, E.M., Lilea, E., Anghelache, C-tin (2002). Tratat de statistică, Editura Economică, Bucureşti Dumbravă, M. – „Utilizarea seriilor dinamice în analiza firmei”, comunicare la Simpozionul Internaţional, Universitatea

ARTIFEX, mai 2007 Anghelache, C-tin (2004). Statistică teoretică şi economică, teorie şi aplicaţii, Editura Economică, Bucureşti Bădiţă, M., Baron, T., Korka, M. (1998). Statistică pentru afaceri, Editura Eficient, Bucureşti Box, G.E.P., Jerks, G.M. (1970). Time Series Analysis, Forecasting and Control, Holdenday, San Francisco Dumbravă, M. (2007). Aspecte teoretice privind analizele economice pe baza seriilor cronologice, Referat doctorat,

octombrie Yulle, U.G., Kendall, M.G. (1969). Introducere în teoria statistică (traducere), Editura Ştiinţifică, Bucureşti, 1969


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POLICY MAKING AND THE SPHERES OF INFLUENCE IN THE EUROPEAN UNION

Andrei HREBENCIUC

Assistant Professor Academy of Economic Studies, Bucharest

Abstract. With the adhesion in the European Union, Romania must realize the

integration in the system comes along with formal and informal obligations. One of the system’s purposes is the cohesion between the members, least but no less important is the politics co-ordination between the members and the European authorities in developing a unitary system.

We have to participate as a state to the European project and to learn to benefit from favorable decisions and directions for our development.

I will emphasize some concepts in order to incline the balance of integration to success, so that Romania can become a positive example for the members to come .

Key words: European Union; constitution draft; policy making; competences;

european lobby.

Romania is changing fast, after 18 years from the revolution we are an integrated part of NATO and the European Union but are we capable of using the integration as a step forward or we will be the problematic eastern member of this system?

The European Construction has some rules and directive lines, but then every country has to develop its own path to success, in order to win or profit from economic growth somebody has to lose. ”What we do in life echoes in eternity”, it is our option to become the ‘new Ireland’ of the system or just a negative externality of the European Union like Portugal.

The admission of Romania and Bulgaria in 2007 came in a difficult moment of the European project. After 50 years, the European Union confronts with three major problems:

1. The constitution draft – after the negative approach toward the constitution from

the citizens of Holland and France, the project has a problem of identity. The primary purpose of EU is to improve its institutions and to clarify the decision process. Nowadays the system is not perceived as close to its citizens, the Europeans are not convinced this project will add welfare to their lives. In order to be functional a new treaty must be unanimously agreed and ratified by all the 27 members. The latest EU treaty was finally agreed at a summit in Lisbon in October 2007 after long negotiations between the members. The treaty creates a full-time standing president of the European Council elected by the heads of the government for a two and a half year mandate and a new foreign minister. The foreign minister will have to work for both governments and European Commission, will have political clout and his own diplomatic agenda. The structure of the European Commission will be reduced, the members will lose their right to send one commissioner


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each to Brussels. The national parliaments will be allowed to protest if they consider a proposed EU law unnecessary for their future plans.

2. Popular disenchantment with the project - as Mr. Delors observed there is no unity between the members, the European leaders devote their time to attacking Brussels in order to explain some national difficulties, while taking credit for all that is good and comes out of Brussels .Few leaders praise the achievements of the system, we should not forget that EU created 12 millions jobs in the last 8 years and the unemployment rate fell to 7.5 % .Still the opinion polls reveal a big dissatisfaction with the union and a strong opposition to further enlargement .In the new members, people have a warmer approach but even in these countries it is not hard to discover eurosceptics

3. Slow economic growth – it is clear that the EU can not sustain the economic growth of the 60s, when there were a lot of favorable factors. Reconstruction after the war had boosted growth, the movement of workers out of farming and into industry had raised productivity and GDP and many more women had entered the labour force .Nowadays the German economy is still recovering, France is struggling to modernize its economy and the new members are trying to adapt to the Union .GDP per head in the Euro area is almost 30% lower than in America and the gap is increasing: OECD reveals that trend growth per person is about 1,5% a year, compared with America’s 2%. In a way the perception that Europe has stopped catching up with America is accurate. The European response in improving its path has come in two directions:

• the creation of the euro (1999) and the Lisbon Agenda (2000) with its ambitious goal “the most competitive and dynamic knowledge – based economy in the world“

There is an intense debate in the European Union about the creation of the euro and

its effect on the system. Some consider this decision as a step forward to further integration of the system, OECD reckons that euro has boosted the intra-EU trade between 5% - 15% .The euro established as a competitive rival for the dollar, it now accounts for 25 % of global foreign-currency reserves .But the impact has been limited because of its members’ failure to liberalize enough .The stability and growth pact set rigid limits on budget deficits and threatened with sanctions if those limits were not respected .Since then the pact has become much more accommodating as more and more countries breached the budget deficit .Mr. Almunia reckons that “it is now sufficiently flexible to set a reasonable long-term for those euro-members that still need more fiscal consolidation”.

Can a state hinder the European Union plans? Everyone imagines the European Union as an old wise prophet full of knowledge, but

we should all realize that this prophet has its limits, in order to succeed in the system every member must be able to create and follow its own strategic plan.

In its history there were situations when countries imposed and compelled the Union’s behavior. Denmark adhered to the project in 1973 but the national parliament was very concerned about the future of the European project. In order to remove the doubts, they created a parliament commission to negotiate a mandate with the government for the decisions concerning the European Union. This decision converted a seemingly weak government at home in a tough negotiator at the European Union. The Danish government invoked at every negotiation that the pressure from the national parliament is very high and the public debate in their country is very intense regarding the European decisions.

But this example was not followed by other members, there are many countries in which the parliament failed to achieve the public credibility, the opinion polls reckon that many citizens don’t even know the name of their representatives in the European parliament.


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Spain and Ireland threatened to block the wave of admissions in 2004 because with the integration of 10 relatively poor members their regions would no longer be eligible to receive funds for regional support .As we can see a strong position from the national administration plus an efficient lobby in Brussels can produce great effect.

Nowadays we have the example of France and Germany which oppose further liberalization of the energy market. French energy strategy is diametrically opposed to the Commission’s plan to make the market more competitive. Andris Piebalgs, the EU energy commissioner concluded that big integrated firms such as France’s EDF and GDF and Germany’s E.ON and RWE are the main reason why Europe’s energy market is so dysfunctional .In a response regarding this situation France’s European affair minister, Jean Pierre Jouyet, declared: ”What is important is that Europe defends its own interests. It is absolutely not a question of protectionism.” He thinks the separation of energy production and transmission assets, as advocated by the European energy commissioner, would weaken the competitiveness of operators without guaranteeing lower prices to consumers. (Mr. Jouyet spoke at the European Parliament a few days after the announcement of the merger of GDF and Suez, two French utilities that will together become the world’s third-biggest utility). France and Germany want to create vertically integrated giants to compete with Gazprom and other big producers.

As a conclusion, his words reveal the French position on this problem and put an end to the hopes that the French government might compromise in the debate over the commission’s plan to reform the energy market.

Related to the energy sector, there is another big controversy, Poland blocks the European Union because of its conflict with Russia. In order to negotiate with foreign countries different strategic aspects EU has to agree on an internal document signed by each member. Poland refuses to sign this document because Russia blocked their food exports motivating that the products do not meet their hygiene standards .Anyway, the future seems encouraging, the coalition led by Mr. Tusk won the parliamentary elections in Poland so we have every right to hope that the foreign policy of this member will change.

Can the European Union save a country from its national reality? Enlargement is a process with a strong negative media image, nearly 2/3 of French

and Germans and half of Italians have a poor opinion about it .After January 2007 the big problem regarding Romania and Bulgaria is whether they really implement the European decisions. Both countries have problems with Justice and weak institutions and are considered relatively poor members with incomes around one-third of the EU average, less than any of the eight other ex-communist countries that joined in may 2004.

GDP per head in PPP, 2005, EU25=100

0 20 40 60 80 100 120

EU25

Bulgaria

Romania

Sources: Eurostat; European Commission.


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The main macroeconomic difference is that Romania’s currency floats, whereas Bulgaria’s is pegged to the euro. Both countries have current – account deficits, Bulgaria 13.5% of GDP in 2006, Romania 10.3 % and continuing inflation which means the euro adoption is at least a decade away.

First of all in both countries dominates the idea that the European Union is a scarecrow who will punish every fault imposing sanctions. But imposing sanctions was far more easy before entering the European Union, as we know a member can not be removed from the union, the only possible option is to suspend the member’s voting rights for a period of time (Austria – Heider 2000).

Every state has to create a multi-annual plan in order to access EU money, has to create its own path to success. As Ireland proved in order to succeed in the catching-up process you have to reform the institutions, to create a regulated business environment and to maximize your own competitive advantages.

Romania implemented a flat tax rate in order to attract foreign direct investments, encourage the creation of new companies and reduce the grey economy.

In the Union, there were a lot of discussions about the implementation of a flat fiscal rate, Germany suffered from the delocalization of the big companies to Slovakia, but then the members aren’t keen in renouncing to their own fiscal policy. In the euro zone, fiscal policy is the one of the few devices controlled by the national governments, the monetary policies and decisions are implemented by the European Central Bank.

And in an inter-dependent financial system, the fiscal policy can protect the state from asymmetrical shocks (imagine what happens if the European Central Bank increases the interest rate in order to cool down the economy and Romania is in a period of recession which requires low interest rate levels for stimulating investments).As any developed economy we have to create a multitude of win-win situations, Romania will accelerate the catching-up process by attracting European direct investments and regional funds and the Union will profit from our newly evolved market.

As a country, I think we have some competitive advantages that could help defining us as a respectful and integer member of the project:

• Agriculture - Romania should be very sensitive and interested in all the debates regarding this sector of economy. First of all we should know the funds fated to agriculture represent 50 % of the European Union budget .This is rather interesting because many members don’t even have a developed agriculture system .But now with the integration of Poland (2004) and Romania ( 2007) some evolved economy which attracted large sums of money in the past and gained from this system ( France) realize that this distribution of funds will no longer be in favor of their economies. So they start making lobby in Brussels and propose new methods on agriculture funds, they consider more appropriate to transfer the funds to the members and then through a national approach the funds should arrive to the farmers .Romania should adopt a very tough position regarding this matter at Brussels. Starting next year Romanian farmers will receive only 30% from the value of subsidies received by other states’ farmers, the percentage will increase every year until 2016. The Union motivated the decision by pointing out that a full value of subsidies will not encourage Romania and Bulgaria to restructure their agricultural system. A new elaborate plan regarding this sector is desperately needed. The funds transferred by the government should not be cyclic influenced by present interests like political campaigns, they should target a real plan involving the development of the sector. Without developing this plan, the market will be crowded with imported goods creating an even bigger commercial deficit problem.


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European Funds ( billion EUR )

0.44

1.15

0.51

0.2

5.69

6.11

0 1 2 3 4 5 6 7

Romania

Polonia

Ungaria

Bulgaria

Germania

Franta

Sum of money received by the farmers

Subsidies Levels

14

22

5

34

55

12

0 10 20 30 40 50 60

Statele Unite

Canada

Australia

Uniunea Europeana

Japonia

Romania%

The percentage received from the total value of production • Biodiesel strategy – everybody knows the discussions regarding this subject in the

world. Some people consider biodiesel a technology for the future, some consider that the evolvement of this system will only create higher prices for food products without resolving the energy problem. Anyway I think Romania should be interested in creating a functional plan because few countries are capable or interested in this area .Starting first will create a competitive advantage that could bring future gains for Romania as a member. Creating some professional projects and presenting them to Brussels will only increase the appetite of the Union on this field. There are a lot of vacant agriculture fields that could be used in a national biodisel strategy. Creating new product units in this area will inevitably attack another sensitive problem – pollution. Restructuring the energy policy by creating more energy through biodiesel units opposed to coal or petroleum units will be a very advanced vision for the future.

• Creation of an European agency - Through years many member states have lobbied Brussels to be allowed to host a European agency (Italy – food safety, Ireland – living an working conditions,, Spain – trade marks and designs, Denmark – environment,


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Finland – chemicals, France – plant variety, etc ).Creating an agency in your country offers you a competitive advantage in an area throughout the Union. The efficient management of the project will only create a new favorable approach in this area in Brussels and will change the perception of the public opinion.

• Lower production costs - We should be aware that Romania still has production costs much lower then many developed members. Even if the integration created a wave of migration to countries like Italy or Spain we should be able to profit from this situation. The flat-tax combined with lower production costs ( utility and labor costs ) makes from Romania a very good opportunity for huge companies. But the government has to create a stable and safe business environment, to eliminate the imperfections of the market and to regain the positive perception through an efficient foreign policy. We should also be aware that Romania owns a very well trained labor force in fields close to technology and industry .All these things should be speculated by the public administration in order to create a developed member and a new force in the Union.

• Create an evolved market – Delgadot revealed in his study that 86% of consumers spending involves national products and services and only 14% involves foreign products or services. The study was made for the developed central European members excluding Romania and Bulgaria so the numbers may not be exact for the newcomers in the Union. But even so, we should realize that a big part of the economic growth comes from the national market and the national approach towards the market. Services are an area that cannot involve export (1), the services are connected to the public administration and the national business environment. It is fairly obvious that the big telecommunication companies will keep arriving to Romania and the national companies will hardly resist on the market, but what I wanted to point out is that the service sector of every member depends directly on its government policy. The controversy in the European Union is that the services market is not efficiently designed and that state companies still have strong positions very hard to compete with.

Policy making and competences in the European Union The EU did not begin life as a federal union, nor, in the view of most analysts, does it

represent a fully developed federation today. Nevertheless, the idea of federalism motivated the creators of the system, but forced by the strong resistance of national governments had a different approach toward the project. The vision of traditional federalist changed into a more sector and incremental approach.

The most difficult issue involving the Union and the federalism vision is the distribution of powers within the system. The ideal purpose of the project was to create a powerful combination between monetary and fiscal policy; smoothing out asymmetric shocks through fiscal policy and encouraging the business boom and the single market through monetary policy.

We often see cycles of federalism in which federal governments centralize power and decision, followed periodically by periods in which states seek a rebalancing and devolution of power back to the states (Wallace, Wallace 2004):

• Centralize initiatives (the founding years of the 1950s, the integration process in the 1980s)

• Devolution initiatives (the Gaullist – led resistance of the 1960s and the post-Maastricht backlash of the 1990s)

Most federal systems engage in evident fiscal transfers across state boundaries while the EU budget has been capped at a small 1.27% of EU GDP, predominantly devoted to agricultural and cohesion spending. This situation creates an unpleasant position for the


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Union because it cannot engage in big redistribution systems and macroeconomic stabilization. As you can predict, the coordination system between members and the Union must function efficiently in order to maintain stability.

The output of the Union is influenced by two main factors: • Demand factors - the designing of a single market has put pressure on the members

to adopt common and harmonized EU regulations in order to remove trade barriers and ensure the free movement of goods, services, capital and labor.

• Supply factors - the European Commission plays a vital role in enforcing regulations and encourage the producers. The debates over areas monopolized by the states and markets influenced by huge companies are still very present.

These two variables must be combined in order to reach an equilibrium on the market. The single market is one of the aspects that influence the life of the Union while the coordination concept will evolve the European project. But regarding this project we can raise a multitude of questions: Which is the best way to ensure the coordination? What sort of legislative regulations are necessary to optimize the process? Should we sustain the “tie-hands” strategy? How can we absorb the asymmetric and symmetric shocks?

After all the debates and discussions regarding the coordination of competences in the project were divided in three categories:

Exclusive competences - In this case only the Union can create and adopt laws and

regulations. The states have “tie-hands” in these situations, they are forced to implement and respect the EU decisions. We have a range of areas that enter under the exclusive competence of the Union:

• Monetary policy for the members that adopted the euro currency • Common commercial policy • Conservation of biologic resources part of the fisheries policy • Customs union Common competences – European Union works with the members in order to create

a set of functional regulations. The members can exercise their competence if the Union decides to refuse its prerogatives regarding a subject. The competences are applied to a set of areas:

• Single market • Justice and security policy • Agriculture policy • Transport policy • Energy policy • Social cohesion The free movement of labour force represent a very sensitive field .The Union tries to

orientate the policies through directory lines. The question which raises is why the developed states don’t oppose the infusion of new labour force from the poorer members?

The developed countries realize that their economic growth can be sustained with periodical infusions of capital or work force, so from an angle they criticize the migration of work-force and from another angle they profit from it. As we can point out, the small percentage of sums spent on development in the European Union budget reveal a concerning fact; the Lisbon strategy from 2000 was not respected and the Union failed to attract large sums of money into the development and research domain.


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The study tries to emphasize some aspects of the European Union and to overpower some conceptions that the Union is either a bad master that dominates its poorer man-servants or a good one that brings wealth without any sacrifice. The national approach of every member is ultimately decisive, we are integrated in a game with precise rules in which our strengths can turn the result into a win or a loss.

Bibliography

Allsopp, Ch. The future of Macroeconomic Policy in the European Union, February 2002 Capital, Încă opt ani de secetă de subvenţii pentru agricultură, noiembrie 2007 Comisia Europeana (2004). Realisons Lisbonne. Reformes pour une Union elargie, rapport

de la Comission au Conseil europeen de printemps The Economist, The world in 2007, 21st edition The Economist, We’re off on a European odyssey, september 2006 Dinu, M., Socol, C., Marinas, M. (2004). Economie europeană. O prezentare sinoptica,

Editura Economică, Bucureşti Dinu, M., Socol, Cristian, Niculescu, Aura (2006). Fundamentarea si coordonarea

politicilor economice în Uniunea Europeană – Editura Economică, Bucureşti Moussis, N. (2006). Access to European Union – laws, economics, policies; European Study

Service 15th edition Hugo Zsolt de Souza, The future of the stability and Growth Pact as a tool for Economic

Policy co-ordination, Policy Papers no 9, April 2004 Wallace, H., Wallace, W. (2004). Procesul politic in Uniunea Europeană, Editura Arc,

Chişinău


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A COMPARISON BETWEEN CALIBRATION AND BAYESIAN APPROACH ON A REAL BUSINESS

CYCLE MODEL

Petre CARAIANI

Candidate Ph. D. Institute of Economic Prognosis, Academy of Romania

Abstract. In this paper I compare the calibration technique with the Bayesian approach in the context of econometric methods of estimating structural models. I use the real business cycles model to apply both techniques. The model is calibrated and estimated for Romanian economy using quarterly data. I compare then the results of the estimation in terms of second order moments.

Key words: estimation methods; Bayesian methods; business cycles. REL Classification: 8H, 10G.

The real business cycles model (RBC, hereafter), that originates in the Kydland and

Prescott (Kydland and Prescott, 1982) contribution, is one of the fundamental macroeconomic models. Nowadays it continues to be the foundation of large macromodels which are used both in analysis and forecasting of the economy.

In this paper I compare two methods of estimation of the structural models, namely the calibration approach and the Bayesian approach. I discuss then the performance of each of the methods by applying them on a real business cycles model on Romania data.

This article is structured as follows. I present in the first section the two estimation techniques. In the second section I present the real business cycles model used in the application. In the third section I apply the two methods. The last section is dedicated to the summation of the results and a discussion of the implications of the paper.

1. Methods of Estimation of the RBC Models 1.2. Calibration The calibration method was proposed for the first time by Kydland and Prescott

(Kydland and Prescott, 1982). First of all, the calibration approach is distinguished by econometrics, as the latter developed following Haavelmo (Haavelmo, 1944). Calibration appeared as a natural consequence of the `70`s debates, when the Keynesian approach based on simultaneous equations system could not predict the stagflation, and also due to Lucas (Lucas, 1976) critique on the economic policies based on simultaneous equations system.

Kydland and Prescott argue that calibration originates in the econometric paradigm proposed by Frisch (Frisch, 1933), which viewed the econometrics as a synthesis between quantitative economics and statistical observations. They argued in the favor of a quantitative approach without probabilistically foundations.


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The calibration process consists in setting the values of the parameters either on the basis of previews estimations, or on microeconomic studies, or based on the long run behavior of variables, on the so called big ratios.

Although when introduced was a novel and innovative way of testing the macroeconometric models, today calibration is rather a preliminary exercise in testing a model.

DeJong and Dave (DeJong and Dave, 2007) argue that the first critique of calibration can be found in Haavelmo (Haavelmo, 1944). They argue that, under the lack of proper metrical statistics to measure the quality in which the model reproduces the behavior of real data, we cannot accurately test a model.

Another significant discussion of calibration was done by Hansen and Heckman (Hansen şi Heckman, 1996). They sustain that there is no fundamental difference between calibration and estimation. They contest the use of the parameters resulted from microeconomic studies in the macroeconomics, on the idea that this is not always feasible, mostly because of the uncertainty associated to any estimation.

1.2. The Bayesian approach DeJong and Dave (DeJong and Dave, 2007: pp. 219) underline that the Bayesian approach is

very relevant in the context of structural models, as they contain prior information by their nature. What distinguishes the Bayesian approach from other estimation techniques, is that it

views the parameters to be estimated as random variables, see An and Schorfheide (An and Schorfheide, 2007), Koop (Koop, 2003), to which probabilistic uncertainty is associated.

A second essential feature is the fact that the probability distribution is determined from a prior distribution.

If θ is the vector of parameters to be estimated, g(θ) the prior distribution, f() stands for the sample information, then the posterior distribution can be obtained using the Bayes’s rule:

( ) ( )( ) ( )θθ

=θ gyf

yfyg (1)

2. A real business cycle model The model I study is that of Hansen (Hansen, 1985), one of the most representative real

business cycles models. In this section I present the model as outlined by Uhlig (Uhlig, 1995). The model consists of a finite number of representative agents characterized by an infinite

life. Each agent maximizes the expected lifetime utility. In each period the agent optimally chooses the consumption, investments and the labor effort, under the constraints given by its income.

In terms of the social planner, the problem is to maximize the total utility of the agent given by:

⎥⎥⎦

⎤

⎢⎢⎣

⎡−

η−−

β∑∞

=

η−

0

1

0 11

maxt

ttt AN

CE (2)

where β is the discount factor, Ct is the consumption, η is the relative risk aversion coefficient, Nt is the number of hours worked, and A is a parameter characterizing the utility function.

The maximization problem is done under several constraints. The first constraint is that of the equilibrium condition for the goods market, namely:

ttt YIC =+ (3) In each period the agent faces another budgetary constraint:

1)1*( −δ−+= ttt KIK (4)


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The next constraint is given by the production function. I assume a Cobb Douglas production function:

α−α− ××= 1

t1ttt NKZY (5)

Where Nt is the time resource, Zt is the total factor productivity and α is the elasticity of the production with respect to capital. The production function is characterized by constant returns to scale.

The last constraint is given by the specification of the TFP dynamic through the equation:

t1ttt ZlogZlog)1(Zlog ε+×ρ+×ρ−= − (6) The parameter ρ is the technological progress constraint. The error term in the equation

above is a white noise process, representing the innovation in the technological progress. I use the Lagrangian approach to derive the necessary conditions. They are given by

the first order derivatives of the objective function with respect to Kt, Ct, Nt and λt. By eliminating λt, we get the following three equations:

t

tt N

Y)1(CA ×α−×= η− (7)

⎥⎥⎥

⎦

⎤

⎢⎢⎢

⎣

⎡×⎟⎟

⎠

⎞⎜⎜⎝

⎛×β= +

η

+1t

1t

tt R

CCE1 (8)

δ−+×α=−

1KYR

1t

tt (9)

The linearized system is given by the following equations: YyIiCc ttt ×=×+× (10)

t1tt kk)1(KIi =×δ−+× − (11)

tt1tt zl)1(ky +×α−+×α= − (12)

t1tt zz ε+×ρ= − (13)

1yc)(0 tt −+×η−= (14)

1t1tt R)cc()(0 ++ +−×η−= (15)

)ky(KYR 1ttt −−×β×α= (16)

3. The estimation and simulation of the RBC model 3.1. The calibration This section describes the data set used in the empirical analysis and the procedure by

which the calibration was done. I use a set of estimated quarterly data for the 1991-2002. Although there is no official quarterly data for GDP and its components or capital stock, there is one very reliable data set which was made available by Prof. Emilian Dobrescu (Romanian Academy).

The variables in the model are: Ct, It, Yt, Kt and Nt, denoting private consumption, private investments, gross domestic product, capital stock and the population over 15 years old. In


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order to eliminate the influence of population growth I use per capita variables denoted by: ct, it, yt and kt, which stand for consumption, investment, output and capital stock, all the variables being in per capita terms and obtained by dividing aggregate variables to Nt. All the variables are deseasonalized (using Census X12) and expressed in logs.

As it may have appeared clearly from the last section, the model is constructed for a closed economy where the government and the external sector are absent. To account for these features, I exclude both government consumption and investments, and the external flows. Thus I compute a private business output, composed of private consumption and business investments.

Private investments are composed from aggregate investments by firms to which I add aggregate investments by households. Private consumption is the aggregate consumption of household, excluding government consumption. Then GDP is simply the sum of these two components.

Since there is no official estimate of the capital stock in Romanian economy, either at annual frequency or quarterly frequency, I had to estimate a capital stock. The computation was based on a methodology proposed by Dobrescu (Dobrescu, 2006). He argued for the use of the official estimates of tangible fixed assets in the economy, which are available at an annual frequency, from the balance of tangible fixed assets in the Statistics Yearbook. This set allows us to extract two essential pieces of information. The first one regards the reference (or initial) capital stock while the second essential information regards the depreciation rate for capital stock.

The reference capital stock, as proposed by Dobrescu (Dobrescu, 2006), should be the level of tangible asset in the reference year in the prices of the respective year, which can be taken from the Statistics Yearbook. From the initial level of capital stock, I compute an annual series of capital stock in 1995 constant prices using the standard sequential capital stock equation.

The computations imply the use of an average depreciation rate. This is also derived from the balance of tangible assets using the formula proposed by Dobrescu (Dobrescu, 2006):

entrin

out

KKK+

=δ (17)

Where Kout is the level of fixed tangible assets that went out of use during an year, Kin is the initial level of fixed tangible assets and Kentr stands for the new entries of fixed tangible assets. Using the data given in the balance of tangible assets I computed an annual depreciation rate.

In order to derive the quarterly series, I start from the level of capital stock for the year 1990 in 1995 constant prices and use the sequential capital stock equation with a quarterly average depreciation derived from the annual average depreciation and each period investments equal to the investments in the economy in that quarter.

The second issue with which this section deals is the calibration process. The parameters to be calibrated in this model are: steady state technology coefficient, capital share α, depreciation rate for capital stock δ, the real interest rate R, the autocorrelation of the technology shock ρ and the standard deviation of technological shocks σε.

With regard to steady state technology, following the usual approach, I set the steady state technology coefficient to 1. This is just a conventional normalization.

Capital share is a bit difficult to estimate. One approach would be to use the data about compensation of employees in the national accounts, from which the labor share, and afterwards the capital share could be computed. However, the estimates from the national accounts would result in a labor share of only 0.43. This is in contradiction with another source of data, namely the AMIGO survey on households, which is also more accurate. Since the data from AMIGO for household revenues indicates that the actual labor compensation is about 0.6 (an average for 1991-2002 period), I set the capital share to 0.4.


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One may seem surprised that the actual level of labor share of Romania is so high, but actually Romania was not and it is not a developing economy, for which a lower labor share is the rule.

The depreciation rate δ was already discussed in the paragraphs were I discussed the estimation of the capital stock. Using the formula presented and explained there, I find a series for annual depreciation rates. I average this series to get the annual average depreciation rate, and then derive the quarterly average depreciation rate. The estimated quarterly depreciation rate is of 2.4%.

One of the early misunderstandings about the real business cycles approach was related to the real interest rate. Thus Summers (Summers, 1986) was puzzled about the fact that Prescott (Prescott, 1986a) used a quarterly interest rate of 1.01% for the American economy. Summers (Summers, 1986) argued that the real interest rate computed from the T-bills is actually of 1% at an annual level. But, as Prescott (Prescott, 1986b) argued, the real interest rate in the RBC frameworks is derived as the return on tangible assets and it can be computed from National Accounts. If one combines the first order condition for capital with the steady state, then one can compute a real interest rate using the formula:

δ−+⎟⎟⎠

⎞⎜⎜⎝

⎛×α= 1

kyr (18)

Using this formula I find a quarterly real interest rate of 1.013% for the Romanian economy, as an average for the studied period. I don’t discount it with the growth rate of output, since this is approximately zero for this period.

While the parameters discussed up to now have their importance in the dynamics of the model, it is the calibration of the technology shocks that proves essential in the final results, with respect to the simulated standard deviations, cross-correlations or the impulse response function.

As stated above, the first step in deriving the parameters related to the technology shocks is to estimate the total factor productivity. I follow in this paper the conventional view and estimate the total factor productivity as a residual between the total output in the current period and the capital stock contribution and labor force contribution to the production in the current period.

Once Zt has been estimated, I extract a linear time trend from total factor productivity, using the next equation:

t10t ztaaZ +×+= Here t is the time trend and zt stands for the technological shock. I then proceed to

deriving the estimates of the persistence and volatility of the technological shock by estimating an AR(1) process for zt:

tt1t zz ε+×ρ=+ I estimate ρ to be 0.68 and the volatility of the shocks σε to be 0.046. The persistence

parameter is significantly lower than in the developed economies 3.2. The simulation of the model using the calibration In this section I discuss how well the RBC model fits the stylized fact of the business

cycles in Romanian economy for the 1991-2002 period. The below table presents the standard deviations of the real data, the volatility of the variables with respect to production and the correlations with production.


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Stylized data for Romanian economy, quarterly data, 1991-2002 Table 1

Cross-Correlations

Std Deviation

Volatility Relative to

Output -4 -3 -2 -1 0 1 2 3 4

Capital 0.94 0.18 -0.46 -0.37 -0.24 0.01 0.15 0.36 0.37 0.46 0.54 Consumption 5.44 1.06 0.22 0.21 0.31 0.48 0.89 0.54 0.36 0.30 0.45 Interest Rate 0.18 0.03 0.39 0.33 0.38 0.53 0.98 0.48 0.31 0.25 0.33 Output 5.12 1 0.35 0.29 0.35 0.52 1.00 0.52 0.35 0.29 0.35 TFP 6.50 1.26 0.43 0.42 0.44 0.55 0.89 0.49 0.34 0.30 0.35

Source: Dobrescu Data Set and own computations

A better understanding of the results from the comparison of results with the results in the reference studies, like those of Kydland and Prescott (Kydland, Prescott, 1982), or Hansen (Hansen, 1985)) for American Economy.

Production is much more volatile in Romanian economy. This features originates in the two severe recessions Romanian economy passed through during `90`s. The level of the volatility of production is similar to that of other emerging economies.

The behavior of the real interest rate is close to that in the US, but the correlation with the production is much higher. The capital stock has a low volatility relative to production, confirming Nelson and Cogley (Nelson, Cogley, 1999) proposition that on the short term capital is not an explanative variable in the production fluctuations.

Consumption is strongly correlated with production at lag zero, close to the American economy. What if specific is that consumption is more volatile that production. This feature is opposed to both normal business cycles features and RBC standard model.

RBC simulation results, quarterly frequency

Table 2

Standard Deviation

Volatility Relative to Production

Correlations at Lag 0

Consumption 0.94 0.17 0.57 Investments 22.81 4.28 0.99 Capital 1.35 0.25 0.37 Hours 4.84 0.90 0.98 Interest Rate 0.24 0.04 0.96 GDP 5.32 1.00 1.00 TFP 2.47 0.46 0.99

The results of the RBC simulation with respect to volatility and correlations are

partially good. The model offers good predictions for GDP and interest rate. Thus the predicted value of GDP standard deviation is 5.32, while the real value is 5.12. Standard deviations of TFP and capital stock are not as good, as there are some significant differences between simulated value and real value.

The theoretical volatility of consumption deserves some attention. The RBC model class predicts a low volatility of consumption. The results for this model are in line with this feature. But the results do not fit the real data for consumption. A possible explanation if given by the fact that part of the consumption is financed through credits and imports.

With respect to correlations, there are no significant failures of the model in fitting the real economy. The model predicts almost perfect correlations of TFP and interest rate with production,


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but there are some differences relative to real data. The correlation of capital with production is positive, but low, confirming that capital fluctuations do not matter too much for short run movements of output. Consumption correlation with output is much weaker than the real one.

3.3. Bayesian estimation of the RBC model Similarly to the analysis through calibration, I estimate the model in equations (10) to (16)

using Bayesian techniques. The variables used here are the same as in the calibration process. Parameters α, β, δ are calibrated as in the first model. The allocated time for work, as a

percentage of available time, is set at 0.31. The parameters ρ, σ (standard deviation of technological shocks) and γ (preference parameters) are estimated using the bayesian techniques. The observed series is the production gap, computed as explained in the previous section.

The below section present the results of the estimation. The autocorrelation coefficient is estimated at a much higher, suggesting a much persistent process of technological progress. The standard deviations is estimated at a lower value than in the calibration process.

Bayesian estimation results

Table 3 Parameters Prior

Mean Posterior

Mean Confidence

Interval Confidence

Interval Prior

Distribution Standard Deviation

rho 0.950 0.9212 0.8764 0.9674 Beta 0.0250 gam 1.000 0.9434 -0.2597 1.6849 Normal 0.5000 e 0.010 0.0241 0.0097 0.0323 Inv Gamma Infinite

In the table below I present the theoretical standard deviations, volatility relative to

output and correlations with production. There are better results, but also some failures of the results from estimation.

With regard to correlations, there is an obvious improvement for the theoretical correlations. For consumption, the theoretical correlation is of 0.79, closer to the real one, of 0.89. For capital, the predicted correlation is almost equal to the real one.

The model overestimates the correlations between production and investments, interest rate and hours worked. However this is a deficiency of the entire class of RBC models.

With respect to volatility, the results are similar for output, capital and interest rate. The theoretical standard deviation of TFP is lower than the real ones. The estimated model implies an improvement of the predicted volatility of consumption, but the model is still far away from the real data.

Hansen model simulation results, quarterly frequency

Table 4 Standard

Deviation Volatility

Relative to Production Correlations

at Lag 0 Consumption 1.76 0.29 0.79 Investments 23.01 3.83 0.98 Capital 1.86 0.22 0.38 Hours 4.79 0.31 0.97 Interest Rate 0.27 0.04 0.95 GDP 6.00 1.00 1.00 TFP 3.12 0.52 0.99


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4. Conclusion I analyzed in this study two of the most known techniques for estimating structural

models. I compared the two techniques using a real business cycle model applied for Romanian economy.

The results show the superiority of the Bayesian approach, which allows not only the estimation of the parameters and of the standard deviation of shocks, but also allows for the building of confidence intervals for the estimated parameters in the model.

However, calibration remains even today a useful technique mostly in the initial phases of testing a model, and also for nonlinear models which are harder to estimate using standard econometric techniques.

Bibliography

An, Sungbae, Schorfheide, F. “Bayesian Analysis of DSGE Models.” Econometric Reviews 26 (2-3), 2007, 1-60

Campbell, J., “Inspecting the Mechanism - An Analytical Approach to the Stochastic Growth Model.” Journal of Monetary Economics 33 (3), 1994, pp. 479-513

DeJong, David, Chetan D. (2007). Structural Macroeconometrics, Princeton University Press

Dobrescu, E. (2006), Macromodels of the Romanian Market Economy, Editura Economică, Bucureşti

Frisch, Ragnar (1933). Propagation and Impulse Problems in Dynamic Economics, in Economic Essays in Honour of Gustav Cassell, Londra, Geore Allen & Unwin, pp. 171-205

Hansen, G., “Indivisible Labor and the Business Cycle”, Journal of Monetary Economics 16(3), pp. 309-328

Hansen, G., Heckman, J., „The Empirical Foundations of Calibration,” Journal of Economic Perspectives 10, 1996, pp. 87-104

Haavelmo, “The Probability Approach in Econometrics”, Econometrica, 1944 Koop, G. (2003), Bayesian Econometrics. Wiley. Finn, K., Prescott, E., “Time to Build and Aggregate Fluctuations”, Econometrica 50 (6),

1982, pp. 1345-1369 Finn, K., Prescott, E., “Business Cycles: Real Facts and a Monetary Myth”, Federal Reserve Bank of Minneapolis Quarterly Review 14 (2), 1990, pp. 3-18 Lucas, R.E., „Econometric Policy Evaluation: A Critique” in Carnegie-Rochester

Conference Series on Public Policy (1), 1976, pp. 19-46 McCallum, B.T., Nelson, E., “An Optimizing IS-LM Specification for Monetary Policy and

Business Cycle Analysis,” Journal of Money, Credit and Banking 31 (3), 1999, pp. 296–316

Prescott, E., “Theory Ahead of Business Cycles Measurement”, Federal Reserve Bank of Minneapolis Quarterly Review 10(4), 1986a, 9-22

Prescott, E., “Response to a Skeptic”, Federal Reserve Bank of Minneapolis Quarterly Review 10(4), 1986b, pp. 28-33

Summers, L., “Some Skeptical Observations on Real Business Cycles Theory”, Federal Reserve Bank of Minneapolis Quarterly Review 10(4), 1986, pp. 23-27

Uhlig, H., “A Toolkit for Analyzing Nonlinear Dynamic Stochastic Models Easily”, Discussion Paper 101, Institute for Empirical Macroeconomics, Federal Reserve Bank of Minneapolis, 1995


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EFFECTS OF THE ENERGY CRISIS ON BIOFUEL PRODUCTION AND CONSUMPTION

IN THE EUROPEAN UNION

Anca DACHIN Ph. D. Professor


Abstract. The worldwide energy crisis and the necessity to reduce the greenhouse gas emission determined the increased importance of biofuels as alternative energy source. The application of the Biofuels Directive 2003/30 EC has been an impulse to the increase of land area cultivated with energy crops and of the bio-diesel and bio-ethanol production in the European Union. The paper provides an analysis of Romania’s possibilities to be in line with the growth tendencies of production and consumption of biofuels and comply with the EU targets while being competitive. It also presents some negative effects of the increase of biomass production with energetic purposes.

Key words: energy; crisis; alternative; energy sources; energetic purposes.

REL Classification: 15 F Energy policy

Challenges of the energy crisis

The energy crisis and the climate change are major challenges today. They have a global character and imply a change of attitude regarding the management of natural resources and political will to take specific measures which may affect the present way of production and consumption.

Despite the different visions about the expressions of the energy crisis, people agree about the necessity of a sustainable energy balance in the long term. Prognoses show that the world economy will not be able to provide the oil and gas production necessary for the human activities, which are expanding continuously. Considering the present tendencies in energy con-sumption, the world demand for energy is expected to increase by more than 50% by 2050. The developing countries will double their energy demand, according to their high growth rates.

The European Union depends on energy imports just over 50% and an increase to 70% is expected by 2030. The increase of energy demand combined with geopolitical factors brings in front the problem of energy security and the need of change in energy policy. The EU transport sector accounts for more than 30% of the total energy consumption and is 98% dependent on fossil fuels. Since the crude oil feedstock is largely imported, this sector is extremely vulnerable to any market disturbance.

The pressure coming from a growing energy demand generates economic and political tension. The unequal distribution of resources worldwide makes governments use their energy resources as a strategic instrument for political ends. This increases the vulnerability of consumers in importing countries to a supply shock or the resulting price increase that economies cannot bear. For this reason in March 2006 was established the Green Book regarding a coherent common energy policy at the Europe Union’s level.


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A reference parameter which shows the energy resource scarcity is the oil price. It moved around the level of $60/barrel in 2006, then it had a slight decrease in the first semester of 2007 and after that it increased gradually to $80/barrel. In November 2007 it reached a peak price of over $90/barrel. The price is expected to keep this tendency in the future. Oil has multiple uses. In order to illustrate the impact of price increase for crude oil on the European consumer, it is relevant to see the price of automotive diesel oil without taxes at the pump in selected EU Member States. The price of diesel oil increased in the period 1999-2007 about five times and also a price convergence has occurred within the EU (figure1). The price of premium gasoline had comparable levels and it followed the same trend.

0

100

200

300

400

500

600

1999

2000

2001

2002

2003

2004

2005

2006

2007

euro

/100

0 l

ls

Germany

Spain

France

Austria

Poland

Sweden

Source: Eurostat, on-line data base.

Figure 1: Price of automotive diesel oil without taxes at the pump in selected countries of the European Union, in the period 1999/2007. Semestrial data

In the EU prices of transport fuels are made up by adding a substantial excise, which

can vary between 2/3 and 3/4 of the total price. This leads to price differences at the pump between the countries. Since these taxes are not harmonized, the governments have the benefit of some room for manoeuvre to smooth price shocks. This is one reason why demand does not decrease.

In the EU transport is responsible for about 21% of all greenhouse emissions that are contributing to global warming and the percentage is rising (COM(2006) 34 final: pp.3). In order to meet the goals established by the Kyoto Protocol, solutions are required for the reduction of greenhouse emissions from the transport activity. Under these conditions, an alternative solution is the rise of the share of renewable energy sources - biofuel in the case of transport. This is the response to the need of sustainable development, global security and to challenges of climate change.

EU biofuel policy In order to reduce the dependence on fossil fuels and to control air pollution produced

by gas emission from transport, the European Union presented a vision and applied measures aiming at stimulating the production and consumption of biofuel.

The main impulse was given by the Biofuel Directive 2003/30/EC (European Commission, 2003), which demanded to the EU Member States to establish national indicative targets to provide a minimum level of supply of biofuels and other renewable fuels for transport. The Directive establishes reference values for the share of biofuels in total consumption of automotive fuel (gasoline and diesel): 2% in 2005 and 5.75% in 2010.

In the larger context of a coherent and integrated energy policy, the European Commission presented in 2005 the Action Plan which refers to promoting the biomass as a


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source of renewable energy (COM(2005) 628 final). The document establishes measures to stimulate the biomass supply, respectively the energy crops by means of the Common Agricultural Policy, as well as financial support for development of renewable sources trough the Regional Policy. In addition, priority is given to research in the field of biomass by the Seventh RTD Framework Programme (FP7), aiming at optimization of land use for energy purposes and at improving technologies for biomass conversion into biofuel.

In 2006, the European Commission elaborated an EU Strategy for Biofuels (COM(2006) 34 final), which complements the Biomass Action Plan. The strategy includes three major objectives:

- Further promote biofuels, ensure that their production and use is globally positive for the environment;

- Prepare for the large-scale use of biofuels in the EU by improving their cost-competitiveness and by research for the “second generation” of biofuels;

- Explore the opportunities for developing countries. Seven policy axes should help to meet the biofuel targets: 1. Stimulate the demand for biofuels; 2. Capture the environmental benefits; 3. Develop the production and distribution of biofuels; 4. Expand the feedstock supplies; 5. Enhance trade opportunities; 6. Support developing countries; 7. Support research and development. These objectives and measures show the strong decision of the EU to use biofuels as

alternative renewable energy source, by relying on technological progress. The first generation is not cost-competitive and has technical limits in consumption. But with the development of the second generation of biofuels a large scale use of the new products is expected and implicitly the market development.

Development of biofuel production in the EU At present the biofuel production in the European Union is based on the conversion of

energy crops into ethanol, bio-diesel and biogas: • Ethanol production from sugar crops or starch (grain crops); the most frequent use

of ethanol in Europe is, however, through conversion into derivatives such as ethyl tertiary butyl ether (ETBE);

• Biodiesel from oil-seed crops (rapeseed, sunflower, soy bean and other raw materials) converted into methyl esters – FAME (Fatty Acid Methyl Ester);

• Biogas from organic residues and energy crops, but the production is at a smaller scale.

The primary production of biofuel in the EU had an explosive development since 2003 (figure 2). In 2005 the bio-diesel production amounted to around 2.88 million tons equivalent (toe) and the bio-ethanol production around 467,200 toe. The main producers include Germany, France and Italy for bio-diesel, and Spain, Germany and France for bio-ethanol (Vaninni, 2006: pp.64).The European Union is a net importer of bio-ethanol, mainly from Pakistan and Brazil. The production of biogas reached the level of 5.3 million toe in 2006, which is an increase by 13.6% compared to the previous year (EurObserv’ER, 2007). In 2005 the New Member States (NMS) lagged behind, but in the next period their production levels increased rapidly.


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Figure 2. Primary production of biofuels in the European Union, in the period 1998-2005, in tons of oil equivalent (toe)

The increase of primary production of biofuel is due to support measures for energy

crops in agriculture. The provision of additional payment of 45 euro/hectare for a maximum guaranteed area of 2 million hectares cultivated with energy crops in the 27 Member States has generated a significant increase of the share of these crops, also in the New Member States, while the limit of the subsidized area has already been exceeded in 2007.

In EU-27, estimates for 2007 show that areas under rapeseed production increased by 13.6% compared with 2006 and by 31.5% compared to the average of 2002-2006 period (Eurostat). Rapeseed is now the fourth most important crop by area in the EU, after wheat, maize and barley. The largest producers of rapeseed are France, Germany and Poland. The estimation of biomass production for biofuel from different sources, such as grain crops, sugar crops or vegetable oils, is rather difficult, because agricultural products have alternative uses and their distribution by destination is uncertain.

The EU countries experience an expansion of the biofuel industry. There is a significant increase of the production capacities in the refining industry, while the producers are also encouraged by a stimulating fiscal policy. Member States may provide tax reduction under certain conditions. These partial tax exemptions are actually state aid and are allowed only with the approval of the European Commission, according to the compliance with the environmental protection goals. This kind of support must not over-compensate the activity.

The EU goals refer also to other bio-energy uses besides transport, which increase the pressure on the natural resources. Within the EU agriculture is mainly oriented for agri-food products and is not enough prepared for non-food production. The rational use of resources when demand for energy crops increases will imply a change in the extra-EU trade policy by increasing imports. At present EU maintains significant import protection on some types of biofuel, notably ethanol, which has a tarriff protection level of around 45% ad valorem. Import duties on other biofuel – bio-diesel and vegetable oils – are much lower, between 0 and 5% (COM(2006) 848 final: pp.7). The further development of the market will imply the reduction of import protection. But the trade liberalization needs a global approach of the process, because it may cause negative ecological and social effects in developing countries which have high potential for the production of energy crops (Brown, 2006: pp.31-37). New rules for the international bio-energy market will be needed, including the setting up of a certification system to guarantee that bio-energy meets certain environmental criteria.

Structural changes of automotive fuel consumption The compliance of EU Member States with the goals regarding biofuels has effects on

consumers. If there is no price or quality change of the automotive fuel at the pump, the

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consumers do not experience negative effects and the biofuel consumption increases. In this case the problem is on the supply side.

The Member States may establish national target levels of the share of biofuel in consumption under the reference level recommended by the European Commission, by giving an adequate motivation. The experience of EU members shows that even the national targets are difficult to fulfill. The target of 2% for 2005 has been fulfilled and even exceeded only in Germany and Sweden, which have a strong policy in this field, but the rest of the countries were below the target (figure 3).

In 2006, the total consumption of biofuel in EU-25 increased by 80% compared to 2005, which shows the speeding up of efforts to reach the established levels. The main component of biofuel consumption is bio-diesel, with over 70% (table 1), taking into consideration that EU dominates the bio-diesel production at world level.

Biofuel consumption in EU-25 in 2005 and 2006

Table 1 2005 2006 toe* % toe % Bio-ethanol 557288 18.6 877936 16.3 Bio-diesel 2245093 75.0 3849210 71.6 Other** 189572 6.4 649149 12.1 Total 2991953 100 5376296 100

*tons of oil equivalent ** vegetable oil consumed pure for Germany, Ireland and Netherlands and biogas for

Sweden Source: EurObserv’ER, Biofuels Barometer, May 2007. The failure in attaining the 2005 intermediar target and the increase of pressure on the

energy market determined the EU to reconsider the situation and to find new ways to stimulate the consumption of alternative fuel. In 2007, the European Council approved two important objectives in terms of biofuel development, which have to be transposed in a directive by the European Commission:

- a 20% proportion of renewable energy in total EU energy consumption by the year 2020;

- a 10% minimum proportion of biofuels in total consumption of petrol and diesel oil intended for transport within the EU by the year 2020 by all the Member States, and this at reasonable costs. The European council specified that differentiated national targets shall be defined in taking each country’s situation and potential into consideration.

Reaching these ambitious targets requires technological change and additional costs for the consumer. At present arises the problem of new regulations regarding the quality of fuel. The revision refers to the 10% of biofuels that should be directly integrated without having need for a particular distribution system or for particular labelling at the pump. However such regulations require adaptations of the motorisation and the guarantee given by the automobile industry that vehicle motors shall be able to use a fuel containing 10% biofuel. It is likely that vehicles with adapted motors to be more expensive, while the situation of vehicles in use but without adaptation becomes uncertain.

*2006; ** Share of those Member States that have reported a target for 2010; Source: Biofuel Progress Report, COM(2006) 845 final, Brussels, 10.01.2007, pp.15-16.

Figure 3. National indicative targets for the share of biofuel in 2005 and 2010, and the level reached in 2005 (in %)

1,4

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Biofuel share in 2005 Target 2005 Target 2010


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An indirect effect of the increased importance of alternative fuels is that it has the potential to drive up food prices if there is no proper use of agricultural land and of other resources which have alternative uses. This trend could be beneficial to farmers, but it could also result in social conflicts.

Romania complying with EU goals As a response to the EU requirements in the energy field, Romania has created the

legal framework with the Government Decision nr.1844/2005 regarding the promotion of biofuel use and other renewable fuels for transport. This document ensured the transposal of the Directive 2003/30/ EC, including the commitment to introduce the target of 2% biofuel in total fuel consumption for transport in 2007 and 5.75% in 2010. For the target of 10% in 2020, if it will be directed by the European Commission, Romania will need additional economic and legal measures.

Romanian an foreign producers consider that Romania has an important potential for the development of the biofuel production and of the market due to its agricultural and forestry resources, under the constraints determined by the obligation to comply with the EU biofuel goals and standards. The feedstock to be used in the bio-diesel production is rape, sunflower and soybean, while for the bio-ethanol production is corn, sugar sorghum, sugar beet, potatoes and residues from forestry and fire wood.

The subsidies provided for the agricultural producers in 2007 have substantially increased their interest for energy crops. The most obvious signal is that Romania is estimated to have tripled its area under rapeseed, from 110110 hectares in 2006 to 349000 hectares in 2007 and it became the fifth largest rapeseed area in the EU (Eurostat). In the case of other crops, the separation of cultivated area and production by destination is even more difficult to do, but this will be an element of monitoring the energy crops.

Romania is currently making efforts to produce bio-diesel for the domestic market and to reach the biofuel target for 2007. There are several companies which already produce bio-diesel or prepare their production capacities under the EU standard EN 14214. Such producers are Autoelite Baia Mare, Prio-Combustibil Lehliu, Ulerom Vaslui, Expur Urziceni, Ultex Ţăndărei, Ulcom Slobozia, Argus Constanţa etc.

The extension of energy crops for biofuel will be encouraged and accepted in case of a favourable cost-benefit analysis. Fields that have lain fallow in the last period could be an argument for the extension of energy crops. However the capacity of subsistence producers and of small farms to have access to the financial support provided for the production is low, even if they have free land available. As a consequence, it is possible that in the future energy crops will compete with agri-food production in larger commercial farms, which are also more competitive and already give full use to their land. In the absence of strong and well implemented policies, an uncontrolled conversion of land use, the acceleration of soil erosion of ecologically fragile lands, as well as reduction of biodiversity could occur.

The advantage of Romania resulting from the general favourable natural conditions for agriculture is diminished by the yields per hectare, which are lower compared to other large-scale producers in the EU. In Romania this is a motivation for the introduction of restrictions to the provision of support for energy crops. Subsidies are paid only if the yield per hectare exceeds a certain reference level, differentiated according to the type of crops. Biofuels produced from low-yielding-crops, grown with inputs of fossil energy or processed into fuel using fossil energy have the potential to generate more greenhouse emissions than petroleum fuels do.

While being obliged to blend fuel with bio-diesel or bio-ethanol, some petroleum producers prefer the imports, considering that agricultural production in Romania is instable


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and feedstock is insufficient and costly. However the advantage of geographical proximity may actually compensate these aspects.

The final data in 2007 about biofuel production and investment in this field will provide important reference points for the assessment of Romania’s efforts to use its domestic resources for the biomass production and to develop the processing industry.

Bibliography

Brown, L. (2006). Plan B 2.0 – Salvarea unei planete sub presiune şi a unei civilizaţii în impas, Earth Policy Institute, Editura Tehnică, Bucureşti

European Commission – An EU Strategy for Biofuels, COM(2006) 34 final, Brussels 8.02.2006

European Commission – Directive 2003/30 EC on the promotion of the use of biofuels or other renewable fuels for transport, Directive of the European Parliament and of the Council, 8.05.2003

European Commission – Biomass Action Plan, COM(2005) 628 final European Commission – Renewable Energy Road Map. Renewable energies in the 21st

century: building a more sustainable future, COM (2006) 848 final, Brussels, 10.01.2007

EurObserv’ER – Biofuels Barometer, May 2007 Vannini, L., Aragrande, M., Gentile, Enrica – Study on Implementing the Energy Crops CAP

Measures and Bio-Energy Market, final report, Department of Agricultural Economics and Engineering, University of Bologna, Nov.2006


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THE AGRICULTURAL PRODUCTS MARKET: THE IMPACT OF AGRICULTURAL PRODUCTS

CHARACTERISTICS OVER THE TRADE

Vincenţiu VEREŞ Candidate Ph. D. Assistant

Maria MORTAN Ph. D. Senior Lecturer

“Babeş-Bolyai” University, Cluj-Napoca

Abstract. The trade with agricultural products has a series of particularities that came from the agricultural products characteristics. Therefore, the agricultural products market has a physical characteristic. The main characteristic of agricultural products is that they are biological products. The agricultural products have a series of quantitative and qualitative characteristics and particularities that came from the economic environment and they have an impact over the trade. Sezonality, zonality, “lower economicity”, the rigid production structure, and the harvest and manipulation problems are the most important quantitative characteristics. The most important qualitative characteristics are the quality of agricultural products is very hard quantifiable, perisability, fragility, the initial characteristics are modifiable in time and the bio-chemical process continues after the harvest. Other characteristics are the heterogenic agricultural producer’s structure and the association between them is absent. The trade with agricultural products is completely different with other trades and the organization of agricultural products market is made in order to match with these characteristics.

Key words: agricultural product, biologic, characteristic, trade, agricultural products

markets. REL Classification: 7E, 15B.

First, the agricultural products are biological products. This essential characteristic

grants agricultural products commerce specific features in comparison with de commerce of industrial products. The importance of agricultural products in any person’s life is unquestionable. They cannot be replaced from the human nourishment due to the human nature itself. We need to find in our food proteins, glucose, mineral elements as well as vitamins, which assures the optimal functioning of the human body. According to Food and Agriculture Organization of the United Nations (F.A.O.) and World Health Organization, a rational, healthy nutrition has to comply with four essential laws: quantity law, quality law, equilibrium law, and aptness law. The necessary quantity of glucose, lipids and proteins can be covered exclusively by a diet consisting in agricultural products (vegetal or animal) and the necessary quantity of mineral substances and vitamins can be obtain with a diet consisting in nonagricultural natural or synthetic products (Stănescu, 1996). The research regarding human diet evolution distinguished six periods each having a corresponding six specific food generations (Niculescu, 1983; Niculescu,1988). We experience today the sixth


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stage – the assertion of the principals of ecological or biological diet. Ecological food products are characterized by:

• High nutritional value, at list regarding biological and hygiene values, which implies, among others, the consumption of fresh agricultural products or agricultural products with a low level of industrial processing ;

• Chemical composition without genetically modified organisms or their derivates; • The ecological quality of the products. In the context the biological agricultural products and the food products obtained out of

these, especially those with a low level of industrial transformation gain a significant importance. Over the years there have been attempts to replace some of the traditional agricultural food

products with nontraditional and unconventional substances, some of that had proved to be economically unprofitable and extremely biologically dangerous (Micu, Segal, 1989; Muste, 2001). Even nonfood agricultural products are difficult and sometimes even impossible to replace as raw materials for different industries because of their quality (Jurcă, 1994).

Besides the fact that they cannot be replaced, the agricultural products are biodegradable and do not cause pollution and consequently they provide replacement perspectives for other conventional products, for example the fuel (Jurcă, 1994).

As they are biological products, the climate influences decisively the quantity and the quality of the crops. The rainfall and temperature variations, the rise and the spreading of diseases and pests are just some of the factors that cannot be controlled which influence agricultural production. All these conditions generate differences between the anticipated production and the one actually obtained and that strongly influences the agricultural products offer.

Starting from their basic feature – biological products – we can delimit a series of derivate characteristics of the agricultural products that confer distinctive features to the agricultural product commerce as opposed to nonagricultural products commerce.

These characteristics can be marked using different classification criteria but this research we consider just one of them, that is the impact that the natural factors have upon the agricultural products commerce. From this perspective, we can delimit two types of characteristics: quantitative and qualitative

A. The most important quantitative characteristics are: seasonable character and the zonal character of agricultural production; the low economic character of the agricultural production, the relatively rigid production structure, harvest and handling problems, farmers heterogeneity.

• First of all we need to stress out that agricultural production varies in time and space • It is time variable (seasonal) because agricultural products are living organisms

that are subject to natural biological processes may it be the vegetal products or the animal ones. There is a blending of economic with natural and biological processes in agriculture this being a distinctive feature of the agriculture as opposed to the other economical branches, especially industry (Samochiş, 2006).

If we exclude some of the animal products, for example milk, the agricultural production cannot be constantly obtained during the entire year and this is known as “punctual offer” (Saccomandi, 1991: p.62) or time inconstant following precisely and imperturbably the biological rhythm. The “punctual” or time limited agricultural products production for commerce purposes is dealing with a continuous consumption. Being variable the agricultural production receives a rigid character in time hence resulting an important consequence for the commercial activities, the appearance of consumption seasons adapted to production seasons.

To pass this barrier between production and consumption the agricultural products need conserving. Conserving and storing of agricultural products cannot be mistaken with their transformation, which has the scope of changing the products’ form, for example transforming corn in flour. The conservation action supposes additional expenses that will directly influence the offer and the prices of agricultural products meant for commercialization.

Agricultural products conservation attracts additional costs that can be recovered with a higher price in the future. For the agricultural products that can be stored, the conservation


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is a viable option but for perishable products the conservation costs are extremely high and as a consequence there is a trend for their diminution and even their elimination.

The seasonal character of the agricultural production imposes a series of restrictions regarding the logistics, in the sense of finding distribution channels as short as possible for the commercialization of the agricultural products.

The agricultural production is variable in space or we can talk about the zonal character of agricultural production. Because the agricultural production is depending on the land as main production factor, it gets a rigid, immobile character. The distances, sometimes large, between the production and consumption zones determine transportation costs, which weight quite a lot in the total cost of the product.

Consequently, there is a need for an organization of the transportation of the products from the production zone to the big urban centers as efficient as possible. Therefore, an important consequence of the zonal character of the agricultural production is the necessity to adapt the consumption zones to those of production. This adaptation consists in overcoming the high transportation costs, which influence the final price of the agricultural products.

The zonal character of the agricultural production determines the manifestation of the offer’s residual character and the appearance of “residual markets” both at the zonal and national level as at global level, considering the fact that agricultural production is meant for covering the internal consumption needs, the quantities that overcome this level being exported. Secondly, the agricultural products have a low economical character as it results from table 1.

The chemical composition of the main agricultural products

Table 1 Principal components % Vegetal products Water Glucose Proteins Lipids Cellulose Ashes

Cereals (grains) 15 65-75 7-10 2-5 1-4 2-3 Leguminous plants for grains 10-15 25-35 40-50 3-5 5-10 5

Oleaginous plants 10 15-25 15-35 40-60 10-20 5 The potato 66-88 8,7-26,2 0,8-0,9 0,04-1,0 0,2-2,5 0,4-1,9 Sugar beet 75 17,5 4,0 1,0 1,5 1,0 Vegetables 80-95 1-15 0,5-7 0,1-0,6 0,3-2,2 0,3-1,9

Fruits 70-93 5-20 0,1-2,3 0,1-1,7 0,2-2,6 0,2-1,1 White of an egg 87 0,3-0,5 11-12 - - - Eg

gs Yolk of an egg 46-54 - 16-17 32-36 - - Animal products Water Glucose Proteins Lipids Lactose Mineral substances

Milk 80-88 - 3,5-5,7 3,5-7,7 3,9-4,8 0,7-0,9 Meat 50-70 - 13-22 10-30 - 0,6-1

Remade after: Frăţilă, Rodica, Studiul mărfurilor alimentare, Presa Universitară Clujeană Publishing House, Cluj-Napoca, 1997, p.9, 35, 132, 140, 172; Muste, Sevastiţa, Materii prime vegetale, Risoprint Publishing House, Cluj-Napoca, 2001, p.101, 137, 160, 171.

Except some products (cereals, the leguminous plants and oleaginous plants), we can

observe that the majority of the agricultural products have a high water content and as q consequence a low dry substance content.

The ratio between the water and specific substances (glucose, proteins, lipids, cellulose and ashes for vegetal products respective proteins , fat substances and mineral substances for animal pro-ducts) content is 2:1 for meat and 8:1 or even 9:1 for fruits, vegetables, potatoes, sugar beet, eggs and milk. In consequence, the consumed (transformed) quantities for obtaining a certain quantity of dry substance are very large and this is why the agricultural products have a low economical character.

This characteristic directly influences the agricultural products commerce in the sense of increasing the transaction volumes. In the same time, there are difficulties in forecasting the quantities that will be obtained and sold because the water content is suffering


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modifications during the life of the product, even after the ingathering of the products, during the conditioning, the handling, the transportation and the storage.

Thirdly, the production structure in agriculture is relatively rigid. Farms production structure has specific implications, different form other types of enterprises. If the industrial enterprises are organized in different industries, in agriculture, due to it’s particularities they are organized through the combination of different branches because: land is enhanced through different crops due to it’s specific features; the technology used differs from one crop to another; from the production process are resulting both principal and secondary products; the

combination of production process and reproduction process (Samochiş, 2006). The production structure in agriculture is variable in time and space (aspect

previously detailed). More than that it is particularly complex due to the relations established between the components – the production branches. If to all that we add the basic characteristic of agriculture - agricultural products are biological products which follow a natural undisturbed natural cycle – then we can observe the rigid character of the production structure both of the crops and of the animal forces.

The main consequences of the rigid character of the production structure are: • On the short term, the volume of the agricultural production is variable being

determined by the existent production structure (the agricultural potential) and the action of the natural factors – climate and biological;

• On the long term, the production structure can be modified. The offer of agricultural products is influenced by the modification of the production potential, by the nature and quality of the production, by the technical and technological innovations etc. thus considering the long production life cycle, the agricultural production offer can’t adapt on a short term and is difficult to adapt on a long term to the fluctuations of the demand.

Fourthly, we need to mention the harvest and handling problems of agricultural products.

In agriculture as opposed to other industries, the production process finalizes with the harvest of the agricultural products.

In vegetal production, plants – as work object- are effectively and directly connected with the land, being disposed in space in a certain manner, which makes the majority of the operations and implicitly the harvest to take place with the shifting of people and tools on relatively large surfaces (Samochiş, 1997: p.43).

The difficulty of obtaining agricultural products is accentuated by the usage on a large scale of manual work. More then that the harvest takes place in direct dependence with the natural factors. Both the harvest and the transportation and the handling if they are handled properly (the moment chosen and the methods and the means used) can contribute to maintaining the quality and quantity of the production resulted after the application of the anterior works or, on the contrary to diminish them (Voicu, Dobre, 1999).

Even though raising animals implies a high level of work objects (animals) fusion, as opposite to vegetal production, labor consumption for obtaining the production is significant also (Samochiş, 1997: pp.68-69).

All these have as consequence difficulties of harvest process mechanization (more evidently in the case of vegetal production) and a high level of labor consumption.

We can find the same high level of labor consumption in the process of handling agricultural products. In each stage of the selling process, the product needs to be packed and unpacked, loaded and unloaded, transported and stored, but the total amount of costs can be high especially due to the big portion of human work.

Fifthly, the structure of agricultural producers (suppliers) is heterogeneous. Now the farms structure in Romania is heterogeneous, formed mainly form small

farms as it result form table 2. In comparison with the European Union where the proportion of farms with surfaces

smaller than 5 ha is 61.9%, in Romania this percent is almost 94%. More than 90% of the


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latter are individual farms (Samochiş, Vereş, 2004: pp.319-327), their economic situation being relatively instable.

Group dimension based farms’ structure in 2005 (thousands)

Table 2 ≤ 5 ha 5<10 ha 10<30 ha 30<50 ha > 50 ha Total

E.U. – 25 6110,1 1293,8 1384,5 413,1 669,3 9870,7 % of total 61,9 13,11 14,03 4,19 6,78 100 E.U. – 15 3533,0 763,8 958,3 363,0 620,5 6238,6 % of total 56,63 12,24 15,36 5,82 9,95 100 Romania 4205,1 218,9 42,9 4,0 14,1 4484,9 % of total 93,76 4,88 0,96 0,09 0,31 100

Source: EUROSTAT. More than that, the General Agricultural Census (GAC) shows as a number of

3.429.466 farms (representing 76.5% of total farms) that produce only for private consumption, respective a number of 951,945 ( 21.2% of the total) which produce over the internal needs and who’s surplus is destined to the market and only 103,482 (2.3% of the total) are farms producing mainly for the market.

Consequently, the quantity offered for sale is lower, especially due to the high rate of self-consumption even if the offer of agricultural products depends on a complex set of factors.

Besides the heterogeneous structure of the agricultural producers, we can observe their poor organization also, under any aspect. E.U. and Romanian statistics and reports show that the level of association in Romanian agriculture is extremely low regardless they are production agricultural associations and agricultural companies (a number of 2261) or companies (6138), or cooperative (87), all representing under 1% of total farms.

The main consequence of this reality is the weak influence that agricultural producers have on the market of agricultural products.

The lack of association does not allow the individual producers to obtain high incomes, as they cannot influence the price level. In the same time, the markets (the vast majority) are not transparent for the individual producers and consequently they cannot anticipate the phenomenon taken place in the market. Last but not list needs to be remembered the increasingly competition existent in the agricultural production market that imposes producers association (Istudor, 2000: p.199).

B. Among the characteristics that influence the qualitative level of agricultural products there are: the quality of the products that is difficult to measure; the maintenance of the initial quality level of the products; the continuation of bio-chemical processes even after the harvest of the agricultural products.

The quality of the products is difficult to measure and represents the first characteristic we will refer to.

Agricultural products quality evaluation is today, according to modern science of commodities, a process based on the concept of nutritive value. The nutritive value comprises four indissoluble dimensions: psycho-sensorial value, energetic value, biological value and hygiene value. (Segal, 1983).

Psycho-sensorial value and organoleptical and esthetical value is one that give the reason to buy the product. Therefore, organoleptical characteristics are the main criteria to appreciate the quality influencing the selection and acceptability of agricultural products, which have a high level of subjectivity.

The general characteristics that define the psycho-sensorial value of agricultural products are (Diaconescu, Păunescu, 1982): color, aspect, size, texture, and consistence. There are also specific characteristics to a group of products: the juiciness of pulp and


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freshness level – for fruits and vegetables. We have observed that the psycho-sensorial value of agricultural products is modifying in time during the life of product. (Banu, 2000).

The large number of characteristic (generals and specifics) that we must take in calculus to appreciate the quality of agricultural products and the methods and proceeds are multiple and complex and the fact that the characteristics are modifiable in time are the reasons to say that the quality of agricultural products is very hard to quantify.

The most important consequence is that the agricultural products market has a strong physical characteristic, which means that the products must be presents in the moment of trade to appreciate the quality of them.

In the second way we must mentioned that the agricultural products are loosing their initial characteristic.

After the end of the harvest, as we show previously, the agricultural products are loosing their characteristics in time. To pass this problem, the agricultural products can be sell fresh or can be preserved and industrial processing after the harvest.

If we take in count the first alternative, the fresh consumption of products, then good organization of the commercialization process is very important and the agricultural products market is very important too.

In the context it is important that the time of commercialization is short and the marketing channels are short (the direct sell to consumers thought the farmers markets) and the location of markets very close to the production areas (for example the auction sells in Holland). Thus, the management of agricultural products markets must be able to transact large quantities in a short time and the transport must be in time. The agricultural products markets have a physical characteristic.

The second alternative is to preserve agricultural products (aspect that we have presented previously) or to process the agricultural products. The main consequence for the preservation of the initial value of agricultural products is to add in food some additives – which we know by E- additives. Some of them are not dangerous additives in foods, but a lot of them are very dangerous for the human healthy (Socaciu, 2001). The annual reports of international organizations (ONU, 2006; WHO, 2006) show that the mortality of population caused by the use of dangerous additives in foods take the third place, after the drugs consumption and after the car accidents. In the context, the consumption of agricultural fresh products and the food without additives is a extremely important aspect, that is indicate by doctors and experts in FAO/WHO.

In the third way, agricultural products are characterized by the biological processes, which are continuing after the end of harvest process.

That characteristic is given by the fact that agriculture is an activity, which represents a kind of “natural industrialization” (Saccomandi, 1991: p.62) through the photosynthesis and generates merchandises that remain alive and they are in range of biological processes like other organism that is born, grow and die. After the harvest inside agricultural products the biological and chemical processes are continuing at different intensities in accordance with a big number of factors: the origin of product, chemical composition, the preservation and stocking conditions etc.

In case of some agricultural products (the case of fruits and vegetables, meat and lait) the bio-chemical processes continues at different levels and the maturing phase take place after the harvest. This is the reason why the agricultural products are perishable. In other cases (for example crops) processes are going on at low intensities, at a consequence they are going on several weeks, and mounts and crops can be stocked. Independent from the intensity, processes are conducting to the same final: degradation and decomposing of the agricultural products.

The main consequence of bio-chemical processes is that they have a bad influence on the quality of products and their value. For stopping that, it is necessary that agricultural products are consummated fresh, preserved or industrial processed – aspects that we clarify already.


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From the point of view of commercialization process that characteristic means that the harvest period and the sell period have to be correlated perfectly and the most important role is take by the management of agricultural products markets.

All these characteristics give to the commercialization with agricultural products and to the agricultural products markets a physical character. Antonio Piccinini in one of his work (Piccinini, 1998: p.16) speaks about the physical characteristic of agricultural products markets. He said that agricultural products markets are different from other non-agricultural markets by the physical characteristic.

Agricultural products markets have a physical character from the following reasons: • Firs of all agricultural products – as object of trade between producers and

consumers – are phisicaly presented in moment of transaction. The single exception is the agricultural commodity exchange where the presence of the agricultural products is missing but agricultural products are present by samples.

• On the second turn, the farmer – which represent the sellers and the consumer – which represent the buyer are meeting directly, face to face to trade the agricultural products.

• On the tird turn, the meeting between agricultural products, sellers and buyers is made into a phisical location.

These characteristics are the most important and they are completing which other, they are conditioning which other and they have an direct impact over the commercialization of agricultural products (see figure 2).

The main characteristic Agricultural products – biological products

Quantitative characteristics THE IMPACT OVER THE TRADE WITH AGRICULTURAL PRODUCTS Qualitative

characteristics

Sezonality The appearance of consumption seasons adapted to the production seasons. Preservation costs are big.

Zonality The appearance of consumption areas adapted to the production areas Transport costs are big. The appearance of residual markets

Commercialization is made through the presence of agricultural products in the moment of sell. The agricultural products markets have a physical characteristic.

Products Quality is hard to quantify

Low economicity Growing of transactions volumes Prediction of production or quantities to be sell is very hard

The production structure is rigid

On short term, the volume of production is variable. On long term, the production structure is modifiable.

Harvest and manipulation problems

Mechanization problems Labor force costs are big The production cost is growing

The use of dangerous additives (E) for the human healthy The agricultural products market has a physical characteristic

The initial characteristics are changing in time

The farmers structure is heterogenic, auto consumption

The offer is reduced on the agricultural products markets

The lack of association between farmers

The influence of the price, income and concurrence is small.

The preservation costs are big They influence the quality and the value

The bio-chemical processes are active after the harvest

Figure 2. The characteristics of agricultural products and their consequences over

the commercialization process


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Bibliography

Banu, C. (coord.) (2000). Biotehnologii în industria alimentară, Editura Tehnică, Bucureşti Diaconescu, I., Păunescu, C. (2003). Analiza senzorială în societăţile comerciale, Editura Uranus,

Bucureşti Istudor, N. (2000). Modele de organizare a pieţelor agroalimentare – pe modelul legumelor şi

fructelor, Editura Economică, Bucureşti Jurcă, I. (1994). Curs de tehnologia industrializării produselor animale, Tipo Agronomia, lit.

USAMV, Cluj-Napoca McKeever, D.B., Howard, J.L., “Value of timber and agricultural products in the United States”,

Forest Products Journal, Vol. 46, No.10 October, 1996 Micu, I.,Segal, B. et al. (1989). Orientări actuale în nutriţie, Editura Medicală, Bucureşti Muste, Sevastiţa, (2001). Materii prime vegetale, Editura Risoprint, Cluj-Napoca Niculescu, N. (1983). Cererea alimentară, Editura Ceres, Bucureşti Niculescu, N. (1983). Cererea alimentară, Editura Ceres, Bucureşti Niculescu, N. (1988). Progresul tehnic în agricultură şi în industria alimentară, Editura Ceres,

Bucureşti Organizaţia Naţiunilor Unite, “Department of Economic and Social Affairs – Population

Division”, United Nations Publications, World Mortality Report 2005, New York, 2006 Piccinini, A., “Forme di mercato e commercializzazione dei prodotti agricoli”, Genio Rurale,

nr.4/1998 Saccomandi, V. (1991). Instituzioni di economia del mercato dei prodotti agricoli, Editura REDA,

Roma Samochiş, B., “Managementul exploataţiilor agricole”, Note de curs, Cluj-Napoca, 2006 Samochiş, B. (1997). Managementul muncii în agricultură, Editura Risoprint, Cluj-Napoca Samochiş, B., Vereş, V. (2004). Exploataţia agricolă-între teoria economică şi practica

legislativă, Probleme actuale de statistică, Editura Junimea, Iaşi Segal, R., Barbu, I. (1982). Analiza senzorială a produselor alimentare, Editura Tehnică, Bucureşti Segal, R. et al (1983). Valoarea nutritivă a produselor agroalimentare, Editura Ceres, Bucureşti Socaciu, C., “Aditivi, ingrediente şi auxiliari alimentari”, Buletin informativ pentru industria

alimentară. Calita Buletin, nr.5/2001 Stănescu, D. (1996). Interferenţe nutriţionale şi tehnologice, Editura Oscar Print, Bucureşti Tracy, M. (1993). Produsele alimentare şi agricultura în economia de piaţă, Editura IMPEX-92,

Bucureşti Voicu, R., Dobre, Iuliana (1999). Organizarea şi strategia dezvoltării unităţilor agricole, Editura

ASE, Bucureşti World Health Organisation, “World Health Report 2006: working together for health”, 2006


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THE INTERNAL COSTS OF THE FIRM

Monica DUDIAN Ph. D. Professor

Aurelia ŞTEFĂNESCU Ph. D. Senior Lector

Rodica GHERGHINA Ph. D. Lecturer

Ioana DUCA Candidate Ph. D. Assistant

Academy of Economic Studies, Bucharest Abstract. The Economics of the firm is affecting in the latest year of a changing

perspective, from the firm like production function and market actor to internal organization of the firm. Producing suppose resource allocation by the entrepreneurs or/and managers and cooperation between individuals inside the firm. The existence of the firm like institution implies transaction costs, agency costs, the costs of creating incitation and the costs of reducing flexibility. In addition, the existence of the corporations modifies the costs of transaction and acts like a catalyst for the creation and developments of the other firms.

Key words: costs; evolutionist firm theory; economy of transaction.

REL Classification: 7C

Introduction The economics theory that refers to the firm has been developing very fast in the last

years, usually being focused on 3 major directions: the transaction cost economy, the new classic economics and the evolutionist theory. One of the common elements of those mentioned above is the fact that they all study the internal organization of the firm, abandoning the classic point of view that the firm is a “dot” in the ideal network of balance. In this environment, the well functioning of a firm develops organization costs, coordination costs, monitoring and adaptation costs, and/or implies the formation and the activation of some organizational routines.

The internal costs of the corporation: general view

The economics of transaction costs has it’s starting point in R. Coase’s “The Nature of the Firm”, study that starts with the remark that:” the firm is being born when the allocation of limited resources is being decided upon by an entrepreneur. In his article, Coase says that “if the production could take place in a non-centralized way, the fact that these transactions cost something means that the firm organizes something that otherwise would appear as market transaction each time that the costs (transaction costs) are smaller than the ones on the free market” (Coase, 1990, p. 7).


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Continuing Coase, Oliver Williamson sets on building what could be an economics theory of capitalist institutions. Williamson seen the institutions, as he says “micro analytically”, and he sees them as “governance institutions” (Williamson, 1996, p. 5). The firm, as a governance mechanism, exists to lower transaction costs. When he defines the transaction, Williamson mentions “Commons’s three”: the transactions incorporate three aspects: conflict, mutuality and order”, and “governance is the means by which order is being induced, through conflict mediation, so as mutual gain is being achieved through voluntary trade”. Transaction costs, widely, are the cots due to institutional hierarchy, the costs of adaptation, the cost of monitoring of contracts, and the costs due to litigation and sanctioning deviant behaviors. Basically, the transaction costs come from two sources: the imperfection and the incompleteness of information (derived from limited rationality) and the imperfect behavior (possibly opportunistic) of the sides involved (Rao, 2003, pp. 7-10).

Williamson states that the basic attributes of a governance structure – the market, the hierarchy, and the hybrid form – are the intensity of the disturbance, the administrative control and adaptation and the law which contracts are based upon. The intensity of the disturbance is greater in the market’s case, and the administrative control characterizes the hierarchy. There are two ways in which the adaptive mechanism manifests: the autonomous adaptation - manifesting as the general balance theory states - significant for the market, and the coordinated adaptation, through cooperation, which is important for the firm. The law which rules the contracts is the general law, in the market’s case, is the bilateral contracts’ mediated by the general law in the hybrid form case, and the internal regulation strengthened by the hierarchy law. This concludes that the hierarchy governance mechanism sacrifices the intensity of the disturbance for the adaptation through cooperation and through administrative control.

Transaction costs depend on the governance mechanism, but no matter what the chosen mechanism is, they will grow upon the assets’ specificity, namely their flexibility for alternative use. Williamson states that there is a level of the assets’ specificity over which the hierarchy mechanism is cheaper than the market’s, economies being available through the hybrid form (form that Coase named markets inside a firm; Williamson exemplifies: franchise). Therefore, Williamson suggests that the firm, as a governance mechanism, will expand (through the successive incorporation of transactions) until the bureaucracy costs, added to the transaction costs, overcome the gain in adaptation cooperative and control terms. There is a difference from what R Coase stated in the starting years: the firm will expand until transactions through the market will become cheaper than the ones through the firm, this being a result of the decreasing output and the entrepreneur.

Close to the transaction costs is the new neoclassic point of view- built on two pillars, the property low and the agent theory – which is based, as the name suggests, in the general equilibrium model. In this model, the new theory introduces the asymmetric information, which generates agency costs (also known as the transaction costs). Agency costs include: the costs which occur through the creation and the elaboration of contracts, the monitoring of the principal costs, the costs of guaranteeing of the agent (consolidation), residual losses, meaning the inherent loss of opportunities because of the contracts’ incompletion, even if this is optimum. Optimum means that it is negotiated until the supplementary cost generated by a clause is equal to the cost generated by not including that clause (Coriat, Wenstein, 1995, pp. 80-102). In conclusion, the agency costs include all costs that refer to the contracts, transactions, moral hazard and information. Therefore, if the transaction costs economics wants to evaluate a transaction (fundamental unit), the agency theory wants to know the difference between the principal’s interests and the agent.

The evolutionist theory introduces another perspective on the firm, meaning that the firm is an integrated evolutionary aggregate of know-how and technology, which is being


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reached through an evolutionary process, through learning and the formation and accumulation of organizational routines. The evolutionary theory is not it’s self unitary, but is composed of three insights: the selection, the ecologist and the life period. Routines, defined as “models of interaction which are efficient solutions to specific problems”, are specific and non-transferable. Keeping in mind our last interpretation, as the firm grows, the entrepreneur is overcome by the complexity of interactions inter and intra-organization, therefore hierarchy appears. Hierarchy relationships presume the explicit codification of the interactions within the organization, and the creation and the formation of the formal routines. Through the application of a formal routine code, the firm continues to exploit the scale economies. On the other side, it loses flexibility and creativity, thus resulting in a low adaptability to the changes in the business environment and technological creativity. Future development depends on the firm’s capacity to overcome the lack of flexibility, through the scale and purpose economies. An alternative to the strict hierarchy is the division managers (the entrepreneur’s intra-organization subdivision) (Witt, 2005, p. 360), organization which arise other problems: differential mechanisms, the coordination of managers and the management of external invasions. Therefore, the evolutionary theory points out other costs, like rigidity costs and the building and implementation costs of the differential mechanisms.

Conclusions and comments The transformation of a small business into a medium/large corporation and the

exploitation of scale economies is an expensive process. The new theoretical developments follow the identification and evaluation of internal costs. These expenses are expressed financially in the price of the goods, and influence their strategies. The main categories of costs identified by the relatively new economics theories are the transaction costs, the agency costs the institutional costs and the rigidity costs (adaptation costs).

The economics of transaction costs states that there is a degree of the assets’ specificity over which the transaction is included by the firm, through it’s economies from the transaction cost. It would be interesting to approach another issue, the way that the transaction cost is being affected by the existence of the firm. For example, the fact that there are famous law firms determines a good attorney to sign a contract with that organization The existence of the firm increases the cost of transaction of man power who chose a free practice, on the market, through the addition of the opportunity cost derived from the employee status. The existence of the firms determines changes in the legal environment of transaction, no matter what their nature is.

Nevertheless, it is undoubtedly that the evolutionism discusses one of the most expensive issues of the large companies: low flexibility, dependent of the quality of internal bureaucracy (another issue generating costs). These costs are not the only mentionable ones, which impede the growth of the company. . The anti-trust laws apply, first of all. Secondly, laws apply to prevent possible conflicts of interest, derived from the consulting services offered to the customers. For example, if a firm offers fiscal consulting services to a corporation, it is probable that the law prohibits that company to audit that corporation. These market shares are created especially for the small entrepreneurs, lots of them ex-employees of the large companies, beneficiaries of the learning effect.

In Romania, the research towards the microeconomics theories are in the incipient phase, even if the attribute of emergent economy determines, in our opinion, high transaction , agency, rigidity and differential costs.


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Bibliography

Buchholz, G.T. (2004). Idei noi de la economişti morţi, Editura Andreco Educaţional, Bucureşti

Coase, R.H. (1990). The Firm, the Market and the Law, The University of Chicago Press, p. 7

Coriat, B., Weinstein, O. (1995). Les Nouvelles Theories de l’entreprise, Le Livre de Poche, p. 80 -102

Demsetz H. (1997). The Economics of the Business Firm, Cambridge University Press, USA Jensen C. Michael, A Theory of the Firm, Harvard University Press, USA, 2000; Keynes, J.M. (1970). Teoria generală a folosirii mâinii de lucru, a dobânzii şi a banilor,

Editura Ştiinţifică, Bucureşti Rao, P.K. (2003). The Economics of Transaction Costs, Palgrave Macmillan ed. Ricketts, M. (2002). The Economics of Business Enterprise, Edward Elgar, Cheltenham,

UK, Northampton MA, USA Smith, A. (1992). Avuţia naţiunilor. Cercetare asupra naturii şi cauzelor ei., Editura

Universitas, Chişinău Vrânceanu, R., Marc, G. (2004). Bazele microeconomiei întreprinderii, Editura Politrom,

Bucureşti Williamson, O., Winter, S. editori (1997) Natura firmei: origini, evoluţie şi dezvoltare,

Editura Sedona, Timişoara Williamson, E.O. (1996). The Mechanisms of Gouvernance, Oxford University Press Witt, U. (2005). The evolutionary perspective on organizational change and the theory of

the firm, in The Evolutionary Foundations of Economics, Kurt Dopfer ed., Cambridge University Press, p. 360


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CERTAIN ASPECTS CONCERNING THE ANALYSIS OF THE CHRONOLOGICAL SERIES OF MOMENTS

Georgeta VINTILĂ Ph.D. Professor

Mădălina DUMBRAVĂ Candidate Ph.D.

Academy of Economic Studies, Bucharest Abstract. In this article, we have analyzed a number of aspects concerning the

utilization of the chronological series for economic analysis. We pointed out the particularities which characterize the chronological series of

moments. The analysis is accompanied by empirical examples which allow the reader a quicker understanding of the subject.

Key words: chronological series; chronological mean; statistical moment; ordinary

mean; weighted mean.

In the case of a series of moments, there are two situations to face: the series of

moments with equal intervals between the moments and series of moments with unequal intervals between the moments (Dumbrava, 2006a).

If the intervals between recording the terms are equal with each other, then the processing of the series can be achieved by two variants:

• The series of moments is transformed into a series of intervals, by computing the ordinary arithmetical mean for each interval and, then, there are the absolute, the relative and the mean indicators, as previously presented, to be further calculated. For instance, having the values for the fixed funds recorded by the end of each year, their annual mean value is to be calculated getting thus a new series which, as comparatively with the first one, will have one term less. The data of the new series being comparable from the point of view of the time they are referring to may be compared with each other, as both absolute and relative values. The outcomes of the processing of this kind of series may be included into calculations in correlation with the series of other characteristics, being interdependent with the initial ones such as, for instance, in the case of the analysis which is performed between the dynamics of the fixed funds and the dynamics of the production.

• The series of moments with equal intervals between the recorded terms are processed such as and thus the absolute, relative and means indicators previously presented can be also obtained, excepting the mean level which is calculated by using a specific form of arithmetic mean, known as chronological mean in the specialized literature.

The ordinary chronological mean applies in the case of the series of moments with equal intervals between them.

If the intervals between the moments of the terms recording are equal, then processing the series is similar to the case of a time intervals series, excepting the mean level, which is calculated according to the ordinary chronological series (Biji et al., 2002).

The positions of the terms on an axis of a series of moments with equal intervals between them will be the following:


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Eroare!

where: y = the terms of the dynamic series taking values from y1 to yn; t = the intervals between moments of the series which may take values from t1 to tn- Out of the axis of yi values, we can see that the terms are equidistant and that each

of them is marking a moment of the analysed period. As a series of moments includes n terms and n-1 intervals, it means that each interval will be marked by two terms. This is why the extreme terms are showing up only once while the intermediary terms, twice. For instance, y2 is marking both the end of the first interval and the beginning of the second interval while y1 shows up once only, marking the beginning of the first interval.

Consequently, in this case, in order to calculate the overall mean it is necessary to calculate the partial means on every interval, which should be calculated as ordinary arithmetic means of the two terms marking the respective interval and, on their basis, an overall mean of the entire series.

In order to illustrate the calculation modality, let’s take an example, with conventional data, concerning the stocks of goods of a commercial company, during the first quarter of doesn’t matter which year:

January 1st - 500 million lei (y1) February 1st - 580 million lei (y2 ) March 1st - 620 million lei (y3 ) April 1st - 640 million lei (y4) In order to calculate the quarterly mean, we should calculate first the means for each

and every month:

January = =+

=+

2580500

221 yy

540 million lei;

February = =+

=+

2620580

232 yy

600 million lei;

March = =+

=+

2640620

243 yy

630 million lei.

The mean of the quarter will be calculated as an overall mean:

5903770,1

3630600540

==++

=y million lei

If the data are extended and generalized while the mean value is noted as cry we get:

12

...22

13221

−

+++

++

+

=

−

n

yyyyyy

ynn

cr

There are n-1 terms to be taken for the denominator because there are only n-1 partial means which can be calculated for each interval, as against the number of the series terms.

If we make the additions of the numerator in the mean formula, we get:

12

...22 321

−

++++

=n

yyyy

yn

cr

Furthermore, simplifying by 2 the fraction of the numerator:

12

...2 32

1

−

++++=

n

yyy

y

yn

cr

ti

yi

ti t

t 2 t 3 t4

y 1 y 2 y 3 y 4 y 5


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This formula, which applies to the chronological series of moments only, is called chronological mean, having the same content as the overall mean calculated of partial means, and is noted by cry (Van Hauwelingen, 2007).

If the intervals between the moments being equal, it proves to be an ordinary chronological series which is defined as the half-sum of the extreme terms plus the sum of the intermediary terms divided by the number of series terms minus one, due to the fact that the extreme terms are counted as half, hence together they are representing only one term.

Applying directly, without a prior calculation of the means for each interval, we get:

3770,1

32

6406205802

500

=+++

=cry , 590=cry million lei

Consequently, we reached the same numerical value as in the case this mean has been calculated as an overall mean of the three monthly partial means.

The weighted chronological mean is used in the situation when between the moments of the series there are unequal intervals. In this case, on an axis, for a series formed of four terms, they would spread as follows: Eroare!

The terms being distributed at unequal intervals, in order to calculate the mean, it has

to be considered that their alteration is uniformly achieved from one interval to another. In this case, each term will be proportional to a half size of the adjacent intervals, as follows:

Hence, based on this reasoning, the weights for each term should be considered as

half the size of the adjacent intervals, using thus a weighted chronological mean.

⎟⎟⎠

⎞⎜⎜⎝

⎛++⎟⎟

⎠

⎞⎜⎜⎝

⎛++⎟⎟

⎠

⎞⎜⎜⎝

⎛

⎟⎟⎠

⎞⎜⎜⎝

⎛++⎟⎟

⎠

⎞⎜⎜⎝

⎛++⎟⎟

⎠

⎞⎜⎜⎝

⎛

=−

−

2...

222

2...

222

1211

1212

11

n

nn

cr tttt

ty

tty

ty

y

⎟⎟⎠

⎞⎜⎜⎝

⎛++⎟⎟

⎠

⎞⎜⎜⎝

⎛ ++⎟⎟

⎠

⎞⎜⎜⎝

⎛

⎟⎟⎠

⎞⎜⎜⎝

⎛++⎟⎟

⎠

⎞⎜⎜⎝

⎛ ++⎟⎟

⎠

⎞⎜⎜⎝

⎛

=−

−

2...

22

2...

22

1211

1212

11

n

nn

cr tttt

ty

tty

ty

y

∑=

=

−⎟⎟⎠

⎞⎜⎜⎝

⎛++⎟⎟

⎠

⎞⎜⎜⎝

⎛ ++⎟⎟

⎠

⎞⎜⎜⎝

⎛

= 1

1

1212

11 2

...22n

ii

nn

cr

t

ty

tty

ty

y

Here we have the first and the last term weighted with half of the first interval of time (respectively the last interval) and the intermediary terms weighted with half of the adjacent intervals (Dumbrava, 2006b).

t 1

y 1 y 2 y 3 y 4

t 2 t 3

t i

y i

t 1

y 1 y 2 y 3 y 4

t 2 t 3


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For instance, the stocks of goods existing within a commercial unit (conventional data) over a half a year period were the following:

Date Existing stocks (mil. lei)

January 1st 500 February 1st 580 March 15th 680 May 10th 700 June 1st 750

As these are unequal intervals, first of all there is the size of the intervals which

should be set up, expressed in days, while the months should be considered as being equal, 30 days each. Hence:

t1 = 30 days; t2 = 45 days; t3 = 55 days; t4 = 50 days;

1801

1

=∑=

=

n

iit days

where from, the mean level, calculated in million lei through the weighted chronological mean will be:

772,659180

750.1182

502

50552

55452

45302

302

507502

50557002

55456802

45305802

30500

==

=+

++

++

++

⎟⎠

⎞⎜⎝

⎛+⎟

⎠

⎞⎜⎝

⎛ ++⎟

⎠

⎞⎜⎝

⎛ ++⎟

⎠

⎞⎜⎝

⎛ ++⎟

⎠

⎞⎜⎝

⎛

=cry

660≅cry million lei To note that, as for a series of moments with unequal intervals between the recorded

data, the weighted chronological mean is the main indicator which characterizes the series, and the fact that the overall dynamics, both absolute and relative, between the two extreme terms can be also calculated.

It is not possible to calculate the other indicators as a correlated system because the condition of uniformity of the periodicity of presenting the series data is not met, meaning that they are not comparable from the point of view of the variation in time. These series are particularly used for showing data resulting from specially organized surveys, such as census or inventories and they are processed depending on the particularity of each series.

Bibliography

Biji, M., Biji, E.M., Lilea, E., Anghelache, C-tin (2002). Tratat de statistică, Editura

Economică, Bucureşti Dumbravă, M. (2006a). Analize macroeconomice – Teorie şi studii de caz, Editura

Economică, Bucureşti Dumbravă, M., „Analize economice pe baza seriilor cronologice de date”, Dissertation by

the occasion of the International Symposium Statistics within the solutions space, ASE Bucharest, 2006b

Van Hauwelingen, H.C., “Dynamic Prediction by Landmarking in Event History Analysis”, article published in volume 34, no. 1, March 2007, Scandinavian Journal of Statistics, Stockholm, ISSN 0303

million lei


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FINANCIAL LEVERAGE: CLASSIC AND MODERN APPROACH-CASE STUDY ON THE COMPANIES LISTED ON BUCHAREST STOCK EXCHANGE,

EQUIPMENT SECTION

Cristina Maria TRIANDAFIL

Candidate Ph. D. Petre BREZEANU

Ph. D. Professor Cătălin HUIDUMAC


Abstract. This paper focuses on highlighting out the way financial leverage has been

approached, both from classic and modern perspective. Literature on financial leverage is reviewed in order to get a deeper insight on the way theories, concepts and mentalities have evolved. From the classic neutral theory according to which the value of the company is independent from its capital structure till the modern one which permits the company to support its growth potential by resorting to external financial resources, leverage was considered to be a key-element of the corporate financial management, especially in the context of the corporate governance mechanisms implementation.

The last section contains a case-study made on the equipments section companies listed on Bucharest Stock Exchange in terms of leverage evolution.

Key words: financial leverage; corporate governance; profitability. REL Classification: G21, G30, G33

1. Introduction Using the terms of a strict definition, financial leverage represents the total debt

reported to the equity of a firm, reflecting the capacity of the financial managers to attract external financial resources in order to improve the efficiency of the equity.

During the last period, leverage has become the topic of many research papers since the extent to which a firm chooses to attract external financial resources is essential to its life. Studies have proved the fact that in case of a decrease of products demand, firms with a high leverage will be more affected than firms with a lower one (De Jong et al. 2001).


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Nevertheless, leverage has been conceived also as a modality by which a company can increase its growth opportunity. American corporations are known as being the promoters of highly leveraged financial politics which offered them the opportunity to expand by attracting external resources. The concept of ,,leverage by out’’ has become a key-term of the 20th century.

But always during the 20th century Enron Bankruptcy had been also an alarm signal for the financial community. Thus leverage had incorporated also the meaning of the risk increasing philosophy. A company can attract external resources, especially when it goes through a boom period and it needs additional financial resources in order to support it, but this makes it riskier.

And an increasing level of risk is similar to increasing the cost of other external resources which can place the company within the danger of failure area.

The first theories regarding the concept of financial leverage belong to Modigliani and Miller. In 1958 they assumed that the value of the firm does not depend on the capital structure. Later on, authors such as Myers and Majluf (1984), Fama and French (2002) revealed the impact of the fiscality on the capital structure and also on the value of the firm, bringing forth the idea of asymmetry and cost agency.

This paper is structured as follows: the second section is dedicated to the classic theories regarding the leverage, the third section is concentrated on the modern theories regarding the leverage and the fourth section focuses on the case-study.

Section 2 The pioneers within the leverage field are Modigliani and Miller. Trying to seek an

optimal value of leverage which should permit the increasing of firm value, they found the independence between the two variables.

As the value of a firm represents the counterpart of equity and debt, it is not relevant for its value if the the financial resources are internal or external ones. Moreover, the way internal and external resources are mixed does not determine in any way the value of the firm.

But this hypothesis was valid for the so called perfect competition economic world. The same authors introduce in 1963 the concept of ,,corporate taxes” which have an

influence on the value of the firm since interest payments are tax-deductible (Modigliani, Miller, 1963, pp. 433-443).

On this condition, the arbitrage between debt and equity will imply the option for the first one since fiscal economies will be essential in order to ensure the growth opportunities of the companies.

In 1980, DeAngelo and Masulis pointed out the fact that leverage implies not only fiscal economies which should impact positively on the value of the company, but also the increase of the financial risk (DeAngelo, 1980).

Expanding its leverage, a company will be more and more exposed to default risk. Leverage becomes also positively correlated with the level of tangible assets and

negatively correlated with the size of firm. Indeed, firms with a high value of fixed assets are less likely to default and can attract more and more external financial resources taking into consideration the warranty implied by the fixed assets.

Moreover, it has been underlined by many research studies that huge companies which are able to develop diversified activities are less likely to get default.


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Section 3 Classical theories on leverage have been refined by the modern ones which are more

complex and more adapted to the challenges of the internal and external environment of the enterprise.

In 1986, Jensen brought in the modern theories about leverage. Leverage approach is conceived from the perspective of the asymmetry between

managers and shareholders. Managers are not willing to take over more and more external financial resources

since this increases the risk default probability and consequently they face the risk of losing control.

In opposition with managers’ reluctancy to leverage, shareholders are receptive to since it can be used as a modality to exercise control over mangers and reduce the asymmetry costs. Having the company engaged in various debts, managers will be more precautious with the financial politics and more willing to strike for company financial health. The risk default will represent an extra precautious mobile and a way for the corporate governance to be exercised.

Abe de Jong (2001) concluded that it is possible for analysts to make a differentiation between the American and Dutch firms as for the relationship between leverage and corporate governance.

In opposition with American firms which will resort frequently to leverage, Dutch firms have the tendency to avoid it and, therefore, corporate governance mechanisms are absent from that perspective.

The author points out also that leverage can be conceived as a disciplinary device for managers and conclude that firms with lower growth opportunities will not choose leverage alternative.

The disciplinary role of leverage subscribes to the concept of agency costs and it has been highlighted also by Zwiebel (1996) who argued that the mechanisms of corporate governance tend to become useless in the absence of leverage.

The agency cost will be diminished as long as the leverage will be present. Giner Begona (2001) analyzed the impact of leverage on stock prices. Thus capital

structure has become not only a determinant factor for company internal assessment, but also for its external one which is accomplished by stock market.

Taking over the results of research papers published by Copeland and Weston (1986), the author develops the concepts of ,,signaling theory” and ,,optimal financial structure”.

The signaling theory implies the internal information that only managers have access to, which creates the effect of asymmetry between them and the shareholders. In this context of limited information that can be transparent for shareholders, financial leverage becomes a mirror on the perspective of the company.

Analysts had different opinions on the impact of leverage on investors’ appetite for a certain company. Many of them appreciate leverage as a positive signal for investors since only a company with good financial results will afford to attract external financial resources (Ross, 1977).

Others argue that leverage brings in negative perception since the company becomes more and more risky and the cash-flow raised from operations was not enough to cover the financial obligations (Miller, Rock, 1985).

Bernstein and Will (1998) got a deeper insight into the things and analyzed the impact of leverage on the value of firms from the perspective of the comparison between the cost of debt and the return on investment.


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As long as the cost of debt will be inferior to the return on investment, the leverage will have a positive impact on the value of the firm.

When the cost of debt exceeds the return on investment, the leverage will have a negative impact.

Leverage has been conceived also from the perspective of q-Tobin perceived as a report between the total Market Value of the firm and the total value of assets.

As long as the cost to replace a firm’s assets is greater than the value of its stock, the company faces the challenge of undervaluation.

But if the firm’s stock is more expensive than the replacement cost of its assets, the stock is overvalued (Tobin, 1978, pp. 421-431).

Section 4 – Case-study The case-study focuses on the financial leverage dynamic at the level of the Bucharest

Stock-Exchange listed companies, equipment section.

Bucharest Stock Exchange listed companies, equipment section

Table 1 Aerostar Bacau Altur Slatina Armatura Cluj Napoca Compa S.A. Sibiu Electroputere Craiova Impact Bucuresti Mecanica SA Ceahlau Mefin Sinaia Rulmentul Brasov Santierul Naval Orsova Turbomecanica Bucuresti Uamt Oradea UCM Resita VAE Apcarom Buzau

Source: own processing.

Descriptive Statistics corresponding to the financial leverage of the Bucharest Stock Exchange listed companies, equipment section

Table 2 Descriptive Statistics (new.sta)

Lower Upper Quartile Mean Median Minimum Maximum Quartile Quartile Range Std.Dev.

2001 106.9333 107 100 113 103 111 8 4.366539 2002 1.01145 1.01145 0.9012 1.1217 0.155917 2003 1.2351 1.1271 0.264 2.8316 0.5174 1.4221 0.9047 0.983949 2004 0.888845 0.4591 0.2858 3.5323 0.3637 0.8452 0.4815 0.976904 2005 0.987831 0.8206 0.2496 3.9673 0.4901 1.0701 0.58 0.957582 2006 1.130443 0.8268 0.2469 2.9574 0.4808 1.1161 0.6353 0.963531 2007 4.14364 1.0654 0.2501 33.9937 0.4801 3.3721 2.892 8.778409

Source: own processing.


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Analyzing the evolution of the Descriptive Statistics corresponding to the financial leverage during the period of 2001-2007, we could draw the conclusion that companies have adopted the defensive strategy regarding the indebtedness degree and, consequently, regarding financial leverage. This variable decreased continuously: the mean corresponding to the year 2001 was 106.9333 while the mean corresponding to the year 2004 was 4.14364.

The minimum value corresponding to the year 2001 is 100, which implies a complete similarity between the indebtedness degree and the equity; in 2002 it recorded a slight decrease, touching the point of 0.9012. In 2003 the variation is a very high one, leverage decreasing to more than 70% in comparison with the previous year - 0.264. This level was quite stable during the period 2004-2007 since the variations were almost unsignificant – 0.0001.

The evolution of the maximum value of the financial leverage over the period 2001-2007 follows the same pathway as the one of the minimum value. From the level of 113 corresponding to the year 2001, it has been recorded a sudden decrease to the level of 1.12 in 2002.

The financial leverage maximum over the minimum gap does not record a significant modification over the analyzed period.

The financial leverage Standard Deviation diminished in a continuous way from 4.37 in 2001 to 0.86 in 2005.

The sudden variation occurred in 2007, when the Standard Deviation reached the point of 8.78, which is in line with the volatility increase of the financial leverage.

This evolution of the financial leverage has been determined by the macroeconomic environment which recorded an increase of the stabilization degree since economical growth phenomenon was dominant.

Under these conditions, the companies listed on Bucharest Stock Exchange, equipment section, have managed to increase their market and book capitalization value as well as their profitability indicators. Thus indebtedness degree decreased while the level of equity has followed-up a favorable dynamic.

Financial leverage decrease can be also correlated with the idea that companies lack in a corporate culture oriented towards accumulating external financial resources by the mechanisms of the capital market.

From the perspective of the theories which sustain the support role of the financial leverage to profitability, the case study focuses on the evolution of the analyzed enterprises return on equity during the same period.

The descriptive statistics corresponding to the return on equity have followed up a fluctuant pathway. The maximum value have been reached in 2004 – 24.52 – while the minimum one – 81.8453 – was recorded in 2006.

The gap between the two values is quite high, which validates the hypothesis according to which the positive dynamic of the equity was more obvious than profit dynamic.


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Descriptive Statistics corresponding to the return on equity of the Bucharest Stock Exchange listed companies, equipment section

Tabel 3 Descriptive Statistics (new.sta)

Mean Minimum Maximum Variance Std.Dev. VAR1 22.14767 -2.11 174 1920.2922 43.82114 VAR2 8.864667 -34.34 53.44 396.20034 19.90478 VAR3 14.18467 -12.71 120 948.0706 30.79076 VAR4 24.52133 -18.52 270 4770.8076 69.07103 VAR5 12.62133 -120.3 311.3 8304.8557 91.13098 VAR6 -81.8453 -911 44 56583.732 237.8734

Source: own processing. The volatility of the return on equity is reflected by the high variance (1920 in 2001,

respectively 56.583 in 2006) and standard deviation (44 in 2001, respectively 238 in 2006). In order to draw a conclusion regarding the correlation between the two variables –

financial leverage and profitability- a regression conceiving leverage as independent variable and profitability as dependent variable has been built up.

The output of the regression built between financial leverage

and return on equity Table 4

Dependent Variable: ROC Method: Least Squares Date: 07/25/07 Time: 21:53 Sample: 1 30 Included observations: 30

Variable Coefficient Std. Error t-Statistic Prob. C 7.40364778941 1.79465830994 4.125380162 0.000299970542673

LEV 0.066629692995 0.26632069987 0.250185933829 0.04270157548 R-squared 0.00223047818434 Mean dependent var 7.69 Adjusted R-squared -0.0334041475948 S.D. dependent var 7.44786153062 S.E. of regression 7.57123443509 Akaike info criterion 6.9509297753 Sum squared resid 1605.06054439 Schwarz criterion 7.04434293407 Log likelihood -102.263946629 F-statistic 0.0625930014858 Durbin-Watson stat 2.34544907383 Prob(F-statistic) 0.804270157548

Source: own processing. The coefficient of correlation -0.051- is a low one while the values of F-statistic and

the associated probabilities to the Null Hypothesis (0.7368/0.48802) validate the weak correlation between the two variables.

An other test which has been performed in order to deepen the relation between the two variables is the causality test Granger.

The Descriptive Statistics corresponding to the Granger test – F statistic and the associated probabilities to the Null Hypothesis- validates again the weak correlation.


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The output of the Granger test between leverage and ROE Tabel 5

Pairwise Granger Causality Tests Date: 07/25/07 Time: 22:04 Sample: 1 30 Lags: 2 Null Hypothesis: Obs F-Statistic Probability LEV does not Granger Cause ROA 28 0.53894381487 0.590552763777 ROA does not Granger Cause LEV 1.64634396434 0.214668225626

Source: own processing. Globally we can draw the conclusion that as for the companies listed on Bucharest

Stock Exchange, equipment section, financial leverage has not been valorized as a profitability driver.

Entreprises reluctancy regarding external financial resources determined equity increase by profit reinvestment.

For the period to come, in the context of the anticipations regarding the Romanian capital market expansion, analysts forecasted enterprises orientation towards external financial resources and profitability increase by financial leverage driver.

The next researches will focus analysis extension at the level of other sector profiles of Bucharest Stock Exchange in order to depict financial leverage evolution in accordance with the industry characteristics.

Bibliography

Abe de Jong (2001). The disciplining role of leverage in Dutch Firms, Tilburg University, 13-18

Bernstein, L.A., Wild, J.J. (1998). Financial Statement Analysis. Theory, application and Interpretation. New York: McGraw-Hill

Copeland, T.E., Weston, J.F. (1986). Financial Theory and Corporate Policy. Wokingham: Addison-Wesley

De Jong, A., Dejong, D.V., Mertens, G., Wasley, C., The role of self-regulation in corporate governance: evidence from the Netherlands, Working Paper Tilburg University, 2001

DeAngelo, H., Masulis, R.W. Optimal capital structure under corporate and personal taxation, Journal of Financial Economics 8, 3, 1980

Fama, E.F., Jensen, M.C. ”Separation of ownership and control”, Journal of Law and Economics 26, 1983, pp. 301-325

Giner, B., Carmelo, R., “Valuation implication of capital structure: a contextual approach”, Routledge Journals, pp. 17-18

Jensen, M.C., 1986, Agency costs of free cash-flow, corporate finance, and take-overs, American Economic Review 76, 323-329

Miller, M., Rock, K., Dividend policy under asymmetric information, Journal of Finance, 40, 1985, pp. 1031-51

Modigliani, F., Miller, M.H., Corporate income taxes and the cost of capital: a correction, American Economic Review 53, 1963


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Modigliani, F., Miller, M.H., The cost of capital, corporate finance and the theory of investment, American Economic Review 48, 1963, 261-297

Myers, S.C., Determinants of corporate borrowing, Journal of Financial Economics 5, 1977, pp. 147-175

Ross, S. (1977). The determination of financial structure: the incentive-signalling approach Tobin, J., 1978, Monetary policies and the economy: the transmission mechanism, Southern

Economics Journal 44, 1978 Zwiebel, J., Dynamic capital structure under managerial entrenchment, American Economic

Review 86, 1996, pp. 1197-1215


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THE RESEARCH METHODOLOGY FOR THE PERCEPTION OF UNDERGROUND ECONOMY

IN ROMANIA IN THE CONTEXT OF THE EUROPEAN INTEGRATION

Cristina COVACI (VOICU)

Candidate Ph. D. Assistant Academy of Economic Studies, Bucharest

Abstract. Scientific knowledge of an economic phenomenon comes from either the

understanding of concrete facts or from deductive and inductive reasoning. Scientific knowledge is often associated to a scale of social values that gives the research an objective character.

What research methodology should be used to test the perception of the subterranean economy in Romania?

How should the research methodology be used in order to test the perception of the subterranean economy in Romania?

According to economic theory, the answers to the two questions mentioned above will lead to the scientific knowledge of the phenomenon of subterranean economy itself.

Key words: research method in subterranean economy; quantitative and qualitative

research. REL Classification: 2B, 5G, 8A, 2H, 2P

Introduction I will analyse in this paper several general aspects about research methodology in

general, with application to the study of subterranean economy in Romania in the context of its integration in the European Union.

The paper is divided in three chapters. The first part, entitled “ ‘What’ and ‘How’ Can We Know through Scientific Research?”, is intended to emphasize the contribution of scientific research to scientific knowledge, presenting both quantitative and qualitative analysis.

The second part, entitled “What Research Methodology Should Be Used to Test the Perception of the Subterranean Economy in Romania?”, is meant to complete my previous research regarding the analysis of the research methodology for the dimension of the subterranean economy, presenting the main methods for its assessment and highlighting the type of research suitable for the domain of subterranean economy.

The third part, entitled “How Do We Use the Research Methodology in order to Test the Perception of the Subterranean Economy in Romania?”, is intended to clarify the way of acting when using the selected research methodology for the domain of the subterranean economy.

The conclusions of the present study are meant to support the research hypothesis that only a sound methodology can lead us to reliable results with scientific meaning and relevance on the plane of economic reality.


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1. Theoretical fundaments of knowledge thorough scientific research Professor Ronald F. King of San Diego State University (SUA) considers that “The

world, as we distinguish it through science, is either accessible to our perceptions, or constructed by the human mind. We can know the world either starting from external proofs, or through internal logic.” From the intersection of the axis “what” (ontology) with the axis “how” (epistemology) result four fields, as we can see from Table 1:

“What” and “How” we know through science (King, 2005, pp. 36, 37) Table 1

Epistemology disposes Ontology proposes external proofs Internal logic

The world is perceived Pozitivism Metaphysics The world is constructed Empiricism Relativism

Summarising Professor Ronald F. King’s discourse, we must keep in mind that in our

reflection on scientific knowledge we must answer two fundamental questions: a) is the external world put forth under the form of concrete facts, observable without mediation, and does it provide us with the proofs necessary for deciding what is true and what is false?; b) can the external world be known through reasoning or do the external proofs give us the possibility of assessing the statements that we make?

Many ways of generating and testing the truth about reality have been put forth thorughout history. Walter Wallace (1971) discusses four such modalities. The authoritarian way became known in the antiquity, but continued up to the present day. It was thought that priests, kings, presidents and scientists have the natural or supernatural attribute of producing the truth. Therefore, truth was guaranteed by the exceptional qualities of the producer of the statements. The authoritarian way can be encountered even today in the form the appeal to the argument of the authority. Very close to the authoritarian way through the mechanism of producing the truth is the mystic way, in which the state of grace gives to the prophets, seers, to the great mystics, the quality of true knowledge. The logico-rational way is centered on formal logic. It appeals to “the first principles” and truth is established through deduction. The main concern resides in the rigour of logical judgment, without aiming at correspondence to reality. Finally, the scientific way of determining the truth combines the preoccupation with correctly applying the method of know-ledge with rigorous observation of phenomena. The scientific method ensures the desubgectivi-zation of knowledge, offering an image of the surrounding world such as it is in reality, and not as it appears to an individual at the level of common sense. The scientific way represents today the main way of knowing individual and group behavior, facts, phenomena and social processes.

The “objective” character of knowledge in the domain of the social and political sciences is highlighted by Max Weber as follows: “We do not share the old belief according to which the totality of cultural phenomena can de deduced, as a product or as a function, from the sum of the material interests.” (Max Weber, 1993, pp. 27, 47)

At the end of the 60s, in the Anglo-Saxon space, the expression qualitative research became known, referring to a form of research with specific characteristics, a paradigm or a research style in the social and human sciences. At present, not only did qualitative research become famous, making the issuing of a Dictionary of Qualitative Methods in the Human and Social Sciences (A. Mucchielli, 1996/2002) necessary, but it started to be rigidly opposed to quantitative research, instead of regarding the two ways of approaching the socio-human field in their unity and complementarity. But what do we understand by qualitative research? And how is it different from quantitative research? (Chelcea, 2006)

Thus, W. Lawrence Neuman finds eight criteria for differentiating the quantitative style from the qualitative research style, according to the data in table number 2.


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The quantitative versus the qualitative style Table 2

The quantitative style The qualitative style The objective measurement of facts The construction of social reality, cultural signification Centering on variables Centering oninteractive processes, cases Reliability is decisive Authenticity is decisive Value free Values are present and explicit Independence from the context Situational constraints Many cases, subjects Few cases, subjects Statistic analyses Thematic analyses The researcher is detached The researcher is involved

2. What research methodology should be used to test the perception of the

underground economy in Romania? I decided to approach the analysis of the problem of subterranean economy resorting

to a mainly macroeconomic analysis, but with strong elements of microeconomic analysis. Macroeconomic analysis aims at offering the general framework in which the researched topic fits, treating in a purely scientific manner the macroeconomic implications of the uncontested existence of subterranean economy. The microeconomic analysis lays emphasis on the individual and presents him in key hypostases, in which the individual is the main actor in the appearance and extent of subterranean economy, both as an economic phenomenon and as a social, psychological and juridical phenomenon.

Taking into account the two types of analysis presented above and considering the characteristics of both the quantitative and qualitative research, I support the idea of approaching both types of research. According to research theory (Grix, 2001, pp. 34), (Robson Colin, Real World Research, Oxford UK & Cambridge USA) we should make the difference between the two types of approach, taking into account the most important aspects of both of them. Quantitative research is mainly used to study problems of macroeconomics, presupposing a deductive approach that will start the analysis from the general to the particular, it is recognized as having its origin in the positivistic thought, wants to be a method based on testing theories and on economic predictions of general orientation and, not in the least, on highlighting he connections between various variables and economic phenomena.

Qualitative research is used to study the themes of microeconomy, uses the inductive research strategy that starts the analysis from the particular to the general, and has its origin in the interpretivist trend, generates new theories, and, not in the least, interprets events that are important form an economic, historic and cultural point of view. The natural position that I adopt is inclined mainly towards quantitative research, bearing in mind that the theme chosen for research makes the object of macroeconomic research, but an interpretivist qualitative research will certainly not miss here. I consider that the best results come only from combining the two types of research, both quantitative and qualitative.

The global community is preoccupied more than ever with the upsurge of the real danger represented by subterranean economy in the past, present and future economic life, attempting at the optimization of the economic process. The situation is not better at the European level, either. At national level we have witnessed a negative dimensioning of the information that has as object drugs and psychotropic substances and the alarming spreading of drug traffic and abuse among all social categories (Giddens, 2000, pp.223).

At present, no country can consider itself free of this scourge, with dramatic impact on the lives of hundreds of millions of people, seriously threatening economic, social and political stability of the contemporary world. The evolution of illegal drug traffic and


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consumption in Romania and in the geographical area in which we are situated proves that our territory has become an important segment of the “Balkan Route”, a route that provides around 80% of the drugs that exist on the European market and is increasingly targeted by the dealers in order to create a strong consumption market. The events that happened after 1989 in the East of Europe, the geographic position of our country, the misunderstanding by more and more citizens of the notion of “democracy”, as well as the internationalization of organized crime have strongly influenced criminality in Romania, our country being more and more obviously attracted in the network of organized crime. One must not overlook the fact that the mafia organizations offer proofs that they are technically better equipped, more skilled and refined in their illegal actions than the structures that try to counteract them.

Therefore, organized crime represents a serious social, economic, moral, psychological and juridical danger. Its actions are not committed by people in need, which are desperately poor, or by amateurs, on the contrary, they are professional, people that are powerful, rich, without scruples and prejudice. The ones that organize crime on a large scale aim, first of all, at a certian power and position in the community, so that, on the basis of this power and position, the profit should come – a criminal profit that weakens the state because it continuously errodes its fundamental instiutions.

Specialist literature classifies the methods for assenning the subterranean economy according to many methods of classification, as follows : direct and indirect methods, macroeconomic and microeconomic approaches, monetarist methods, accounting methods, statistical methods etc. no matter what the correct percentage will be, it is certain that the economy is only one, in which the subterranean economy is a means of redistribution and must be attentively analysed, bearing in mind that it represents 38% of the international economy. The difference that I will make at this point is that between subterranean economy and surface economy, making up together the economy of a nation. The difficulty of measuring the subterranean economy comes from the method of the differences between income and expenses. Subterranean economy is an ambiguous concept because the process cannot be quantified, it does not belong to the sphere of empirical evidence, being thus, very difficult to report.

The calculation of the real percentage of the subterranean economy comes from the disfunctionalities of the national economy, and so, information from the National Institute of Statistics presents a percentage of 20% of Romania’s economy for the subterranean economy and the National Intelligence Service, a percentage of 40%

A document issued by the European Parliament mentions that: “Subterranean economy is a subject that comes back regularly on the front page of the newspapers and in innumerable political documents. They too readily present figures that seem to have come up the sleeve of a magician only to support some political or purely publicitary interests. It is our duty to draw attention that it is debatable and sometimes even deceiving to try to express such a complex phenomenon by only a few figures”.

Economic theory has tried to solve this problem of quantification of subterranean economy. The existing methods, applied until now for assessing the extent of subterranean economy are as follows:

“Rosanvallon classification” (Rosanvalon, 2/1980) is a step forward on this path. This classification introduces the concept of occult economy (black-market labor, fiscal fraud, organized crime) and autonomous economy (household activities, bricolage, gardening etc.). The present classification puts forth a distinct treatment from the point of view of statistic evidence, of the elements of subterranean economy. Thus, the general opinion is that, although both components of subterranean economy given by Rosanvallon unfold outside state control, the two have a very different contribution to the total of the economy of one country. Occult economy is characterized by the phenomenon of voluntary dissimulation of its activity, a fact that motivates the statistic estimation of its extent.


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The method of the sectorial type, refers to activities specific to some domains or economic sectors, using case studies and enquiries. This method is useful for obtaining a general view of the extent of subterranean economy in the total of the economy of a country, through adding up the partial results.

The method of the global type aims at assessing subterranean economy at national level. The principle of this method relies on the discovery of the subterranean economy that exists in the economy of a country, and uses three types of investigation: the investigation of monetary aggregates (the way payments are being made), accounting investigation (the type and the amount of the expenses) and the investigation of the indicators that suggest the presence of some subterranean activities (the divergence of the statistical data).

The statistical enquiry is a direct probabilistic research method that relies on the data obtianed from the processing of questionnaires with questions connected to economic behaviour typical for subterranean activities.

The control sample method also known as “method for measuring the conformation to taxes” is a direct estimation method. This method measures subterranean economy as fiscal deficit, the results being obtained by measuring the difference between the incomes recorded in the financial statements and the results obtained through random field controls. The technique of the method consists in organizing intensive random controls in a certain sector of the economy, extrapolating the results to the scale of the entire population that is analysed.

The statistical recording of the “monographic” type (Ivănescu, 1980, pp.31). This is a direct estimation method that can quantify with approximation the level of the subterranean economy in particular sectors, types of activities, regions etc.

The method of the difference between income and expenses is considered to be one of the most precise methods of measuring the dimensions of subterranean economy. The method consists in calculating the difference between the GDP which is calculated through the production cost method and the GDP measured thorugh the method of totalizing the incomes. The fact that the sum of expenses is smaller than the sum of the incomes is the definite indicator of the existence of subterranean economy. The principles of this method can be used also to make the study of the households, which can offer accurate information about the extent of subterranean economy.

The method of physical inputs also known as the Kaufman method relies on the theory according to which the physical inputs of mass consumption are used in subterranean economy at the same rate as the production of surface economy. The method presupposes the calculation of the difference between the GDP estimated on the basis of household energy consumption and the official GDP, which results thus in an estimate of subteranean economy. In her analysis, Maria Lacko (Lacko, 1997), using this method, states that a certain part of subterranean economy is linked to household electricity consumption, as it includes the so-called household production, individual activities and unregistered services.

The labour force census is a very important method, bearing in mind the extent of black-market labour in the total of subterranean economy. The researchers of the field show how the decrease of the level of the workforce in the official economy is interpreted as an index of the increase in the activity in the subterranean environment. This method too has its shortcomings. Thus, the differences between the participation rates may have other causes as well. There are frequently people that work on the black-market and who have, at the same time, a job in the official economy, or who are officially registered as unemployed.

The transaction volume method or Feige method (Feige, 1989) presupposes the existence of a constant relation in time between the volume of the transactions and the value of GDP, on the basis of Fisher’s quantitative equation :

M × V = p × T,


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where M = the monetary mass; V = money circulation speed; P = price level; T = the sum of the transactions. Feige’s method presupposes that in the year for which the evolution of the

phenomenon is measured there was no subterranean economy, and, secondly, the rapport p*T in the total of the nominal GDP was constant all the time if there had not been subterranean economic activities.

The method of demand for liquidities was used for the first time by Philli Cagan in 1958, who identified the conection between the demand for currency and the fiscal taxes, explaining the existence of subterranean economy in the period 1919 -1955. The Cagan method was further developed by Vito Tanzi in the 1980s, when he econometrically estimated a function of the demand for liquidities in the USA in the period 1930 -1980. Approximately 20 years after Cagan’s method, Pierre M. Gutman, also uses the monetary approach, making an analysis of the rapport between liquidities and deposits for the period 1937 -1976.

The method of “complex modelling” also called Frey-weck Haneman method or Multiple Indicators Multiple Causes (MIMIC), is one of the most complex methods because, when applying it, one must take into account many causes and multiple effects of subterranean economy. This method is based on the statistical theory of the unnoticed variables, assuming that many causes and many indicators can be measured, that reflect the changes in the dimension of the subterranean economy.

This brief presentation of the main methods of estimation of the extent of subterranean economy reveal an obvious fact, that is, that none of the methods can render the exact extent of subterranean economy, each method has its strong and weak points. As a recommendation, I would suggest that a better estimate would be the one that would take into consideration not only a single method of estimation but two, three or as many as deemed necessary to cover the entire area of the activities of subterranean economy.

3. How do we use the research methodology to test the perception of the subterranean

economy in Romania? Enste and Schneider make, in their work, a hierarchy of several methods of estimation

of subterranean economy, methods considered reevant by the authors:

The method used The average value of subterranean economy in 5 OECD countries in the period 1970 -1990

The workforce census 14,4 Feige transactions 21,9 Gutman econometric modelling of monetarist type 15,5 Physical input 12,7 Demand for liquidities 8,9 MIMIC 7,9 The difference between the GDP calculated thorugh the income method and the GDP calculated thorugh the expense method

6,4

Control sample (Fiscal audit) 6,1 Statistical research 3,1


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One can easily notice that the highest degree of relevance is held by Feige’s transaction method, Gutman’s method of econometric modeling and the workforce census. If we make a brief analysis of what each method and each component studied predominantly measures, we easily conclude that the three “more powerful” methods measure the components that have the greatest importance in subterranean economy, that is fiscal fraud and black-market labor.

From this short presentation we can become aware of the importance of taking into account more than one method, because they have a similar relevance degree, they only differ according to the component of the subterranean economy they address.

Research in the field has shown the difficulty of measuring the incommensurable, still, attempts at measuring it do not cease to appear.

Conclusions According to economic theory, the answers to the two quastions formulated in the

second and third part of the persent paper, have led us to a scientific knowledge of the phenomenon of subterranean economy itself. The first question drew our attention on the diversity of the research methods available in the specialist literature as well as on the content of each method of research of the phenomenon of subterranean economy. The second question shows how to use the methods presented, offering the optimum solution to measure the extent of subterranean economy.

Bibliography

Albu, L. (1998). Tranziţia economiei sau tranziţia ştiinţei economice?, Editura Expert, Bucureşti

Chelcea, S. (2006). Metodologia cercetării sociologice, Editura Economică, Bucureşti Coşea, M. (2004). România subterană, Editura Tribuna Economică, Bucureşti Covaci, C., “Problema impozitării în contextual integrării europene”, AGER Year

Symposium, June, 2006 Craiu, N. (2004). Economia subterană între “Da” şi “Nu”, Editura Economică, Bucureşti Dobrescu, E. (2002). Tranziţia în România, Editura Economică, Bucureşti Dinu, M. Socol, C., Marinas, M. (2004). Economie europeana, o prezentare sinoptica,

Editura Economică, Bucureşti Giddens, A. (2000). Sociologie, Ediţia a 3-a, Editura Bic All, Bucureşti Grix, J. (2001). Demystifying Postgraduate Research, The University of Birmingham,

pp. 34 Gutman, P.M. (1977). “The subterranean economy”, Financial Analyst Journal 34/1, 1977 Hanemann, H.W., Frey, B., “The hidden economy. State and prospect for measurement”, în

review of Income and Wealth, nr. 30(1) Karl Marx, Contribuţii la critica economiei politice. Prefaţă. În K. Marx şi F. Engels, Opere

alese în două volume (vol. 1), Editura Politică, Bucureşti (1859)1966, pp.313-314. Denzin, N.K., Lincoln, Yvonna S. (1994). Entering the field of qualitative research, în N.K.

Denzin, Y.S. Lincoln (eds.), Handbook of Qualitative Research, Thousend Oaks, Sage Publications, Inc., 1994, pp. 1-2

Pătroi, D., ”Fiscalitatea excesivă li economia subterană: cauze şi efecte”, No. 4 of the Journal of Finance, Banks and Insurance, April 2004


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Popescu, Gh. (2005), PhD supervisor prof.univ.dr. Popescu Constantin, Evaluarea dinamicii economiei româneşti în perioada de tranziţie după 1989, Bucharest.

Rifkin, J. (2006). Visul European, Editura Polirom, Iaşi Robson, C, (2001). Real World Research, Oxford UK & Cambridge USA. Spiro, P.(1997). Taxes, Deficits and the Underground Economy in the Underground

Economy, Global evidence of its size and impact, The Fraser Institute Vancouver. Weber, Max (1993). Teorie şi metodă în ştiinţele culturii, Editura Polirom, Iaşi (1904),

pp. 27, 47


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THE QUALITY OF THE ACCOUNTING IN FORMATION PROVIDED BY THE FINANCIAL

REPORTING – FACTOR FOR THE ECONOMIC GROWTH AND THE ENTITIES COMPETITIVENESS

Maria MANOLESCU

Ph. D. Professor Aureliana Geta ROMAN

Ph. D. Lecturer Academy of Economic Studies, Bucharest

Abstract. Starting from our country status of an European Union Member State,

based on which the observance of the European regulations provisions (the Treaty for the EC Establishment, regulations, directives etc) published in the European Union Official Journal, are applicable to the Member States in accordance with the terms an d requirements established by these, we consider as being useful to the national economic environment to make an analysis of the provisions in parallel with an analysis of the national requirements in the area. The purpose of these analyses is directed first to a correct understanding of the national legislation as well as its consolidation and coherence in order to increase the capacity for their correct application by the stakeholders.

The responsibilities contained by the accounting legislation concerning the quality of the information provided by the financial reporting, in order to ensure a proper protection of the users, as well as the new elements on audit committees, internal audit as well as those concerning the corporate governance in general, are elements which naturally imply analyses and debates of the professionals in the area.

Key words: financial reporting; corporate governance; audit committee; internal

audit; acquis communitaire. REL Classification: 20 D

The Treaty for the establishment of the European Community imposed early from the beginning the harmonization and the conformity of the national legislations with the European regulations and at the same time it mentioned the instruments to be used for this purpose. Consequently, alongside the facilitation of the right for the company establishment in other Member States, the legislative harmonization was also meant to limit the risks generated by the differences in the regulation of the Member States concerning the shareholders, creditors and third parties practice, in general.

In order to answer to these requirements the acquis communitaire on the company law contains the different areas: company law, company accounting, intellectual property law and civil law (Brussels and Lugano conventions on the judiciary competence, recognition and implementation of the court decisions in the civil and commercial areas and the Rome convention on the applicable law to the contractual obligations).


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The harmonization, respectively the conformity process on the company law considered several important issues like for example:

⇒ The conditions for the companies establishment, organization and functioning • Concerning the company establishment the First Directive (Directive no.68/151/EEC)

set the publicity requirements for the establishment of a capital company in order to properly inform the third parties about the newly established company. This compulsory publicity concerns the establishment act, the bylaw, the subscribed capital, the balance sheet and the profit and loss account. Also, the Directive refers to the formalities for canceling the companies which were established by breaching the regulations provisions. These provisions have been completed with the provisions of the Second directive (Directive no.77/91/EEC), which refers only to the share companies. The establishment of these companies requires an amount of authorized equity as a guarantee for the creditors, as well as the observance of some minimum requirements concerning the size and the formation of the minimum equity, the contributions regime as well as the regime of the share issuance and provision.

• On the companies functioning, the First directive is intended to ensure the companies feasibility and validity in their relations with the third parties, this issue being covered only by legislative proposals excepting the twelfth Directive (Directive no. 89/667/EEC) on the limited liability companies with a sole shareholder, the Directive which introduce a rule with important consequences, namely that the respective companies should be recognized immediately after their establishment, being left for the Member States to decide on their internal regulations. Because of this approach, the twelfth Directive can be considered as a framework Directive.

• On the companies restructuring, the third Directive (Directive no. 78/855/EEC) on the mergers at the national level of the share companies and the Sixth Directive (Directive no. 82/891/EEC) on the division of the same kind of companies are intended to provide sufficient guarantees for the shareholders and third parties during the restructuring process.

⇒ Concerning the conditions for the companies with a communitarian dimension, the acquis communitaire intends to facilitate the activity of the companies from other Member States than the state where they have been established and the requirements on the transparency of their branches (the Eleventh directive, namely the Directive no. 89/666/EEC). Also, in 1995 the international convention on the bankruptcy, the conventions which provide for the companies with a communitarian dimension to be declared bankrupt in one procedure and not by multiple national procedures.

The Regulation no. 2137/85/EEC on the establishment of the European economic interest groups facilitates the companies’ cooperation in a Member State with companies or legal persons in other Member States as part of joint ventures.

The second purpose of the acquis communitaire was for the company law concerning those companies wanting to develop activities or to be established cross border, to be under the scope of a sole system of regulations, namely the communitarian system.

For this purpose the Council Regulation no.2157/2001/EEC on the status of the European companies set the legal framework for the establishment of some companies with a European dimension. This regulation provides the minimum share capital for the establishment of a European company, which can not be lower than 120,000 euro. It also set the conditions for a European company to be established, its structure and the conditions for its restructuring and its legal liquidation.

⇒ Concerning the accounting regulations for companies, the European regulation provides for ensuring equivalent information in all the Member States by their financial statements. The Fourth Directive (Directive no.78/666/EEC) requires for the finan-cial statements of the companies to fairly reflect the assets, liabilities, financial position, and


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their profit and loss. More precisely, the Fourth Directive set the structure of the balance sheet and of the profit and loss account, the valuation rules, the publicity rules etc.

The Seventh Directive (Directive no. 83/349/EEC) on the consolidated accounts set clear requirements for the parent companies for preparing the consolidated financial statements in order to reflect a fair view on the assets and liabilities and the financial position of the respective companies.

The Eighth Directive, recently replaced by the Directive no. 2006/43/CE of 17 May 2006, set very strict requirements on the qualification of the individuals which perform the statutory audit of the financial statements prepared in accordance with the International Financial Reporting Standards (IFRS) issued and developed by the IASB and adopted by the European Commission (according to the Regulation no.1606/2002 adopted by the European Parliament).

The harmonization of the national legislation in the accounting area with the Fourth and Seventh Directive has been ensured, by 2005 by the accounting law, by 2005, and by the accounting law and the accounting regulations issued for its application, and the conformity required for this area has been accomplished by adopting in 2005 the accounting regulations conform to the European Directives for all the categories of entities, regulations which became effective on 1st January 2006.

It is relevant to mention here the opinion issued by the General Directorate Internal Market on the quality and the high degree of conformity of the national accounting regulations with the European Directives (this opinion has been expressed following the monitoring process for ensuring the conformity of the accounting regulations approved by the Order of the Minister of Public Finance 1752/2005 with the European Directives).

On 14 June 2006, the European Parliament adopted the Directive 2006/46 of the European Council amending the Fourth and Seventh Directive, but also the Directive son the annual and consolidated accounts of the banks and other financial institutions as well as those of the insurance-reinsurance companies. The provisions of the respective Directive are already implemented in the accounting regulations applicable at the national level to all categories of entities performing commercial activities, and are in force.

We consider as being relevant the provisions of the Directive 2006/46/EC (implemented in the national accounting regulations by the Order of the Minister of Public Finance no. 2001/2006) on the collective obligation of the boards members and of the supervisory boards of the entities preparing the individual and consolidated accounts to ensure the users about the respective financial statements and the management report are in accordance with the national legislation, as well as precise requirements concerning the presentation of the information on the corporate governance. Consequently, such an entity with securities admitted on a regulated market, as it is defined in the legislation in force on the capital market, is forced to include in a distinct of the management report the statement on the corporate governance which will contain at least the following information:

- The corporate governance code applicable to the entity deciding to apply it on a voluntary basis as well as all the relevant information concerning the corporate governance practices applied more than the national requirements;

- A description of the main characteristics of the internal control and of the risk management systems in relation to the financial reporting process;

- How are organized and develops the shareholders general assemblies and their main attributions as well as a description of the shareholders rights and how they could be exercised;

- The structure and how operates the board of directors, the supervisory board, as case may be, and their committees.

Implementation of the provisions of the European Directives on the company law into the Romanian legislation with explicit requirements on the board members/supervisory boards responsibilities for the relevance and reliability of the information contained in the


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financial statements, as well as far as concerns the obligations to make available the information on the corporate governance respond to the requirements of the company law (Company law no. 31/1990 on the commercial companies with subsequent changes and addition in 2006 and 2007 by the Law 441/2006 and the EGO OUG 82/2007) in order to adapt its provisions to the OCDE principles on the corporate governance of the companies.

The changes brought to the Company Law by the Law no. 441/2006, published in the Official Monitor no955/28.11.2006 were intended to adapt its provisions to the principles of the Organization for the Economic Cooperation and Development on the corporate governance of the companies. We believe that it should be pointed out in this framework the new provisions of the law on the companies management in one tier, or two tier system and the requirements on the establishment of the advisory boards (audit committee, remuneration committee etc).

Considering that in practice still exist some confusions on the role of the audit committees, of the role of internal audit, as well as on the corporate governance in general an don its role in the companies management, in the current paper we intended to make an assessment of the content of the legal regulations in the area in order to establish how much the regulation system contributes to the current state of fact.

The one tier management system has the following main characteristics (and we retain only those issues which are relevant as far as concerns the audit committees):

- The company management is provided by the board of directors; - The non-executive function (control by a non executive administrator) and the

executive one (director) are compulsorily separate for the share companies with the financial statements subject to a statutory obligation to be audited;

- The establishment of the advisory committees as part of the board of directors (e.g. the audit committee, the remuneration committee, the nomination committee etc). The audit committee can be established for the share companies with the financial statements subject to a legal obligation to be audited and is formed of at least two members (compulsorily non executive directors) of the boards of directors, of which at least one should be independent;

- The board of directors has a series of basic competencies which can not be delegated to the directors ( as for example: establishing the accounting system and the financial control system, financial planning approval, annual report preparing etc);

- The delegation of the company leadership to one or to several directors, nominating one of them as general director is compulsory for the audited share companies. In this case, the majority of the members of the board of directors will be formed of the non executive directors (members of the board of directors which have not been nominated as directors).

The two tier system has the following main characteristics (we retain here only the relevant issues in connection to the audit committees):

- the company management is provided by the Directorate and the Supervisory Board; - the Directorate members exclusively provides the leadership of the share companies

under the supervision board control, they are nominated by the supervisory board and at the same time can not be members of this Council;

- the establishment of the advisory boards as part of the supervisory board (the audit committee, the remuneration committee, the nomination committee etc). Like the one tier system, the audit committee can be established for the share companies with the financial statements subject to a legal obligation to be audited.

From those presented here result that no matter what kind of the administration system is closed for the share companies, once the company legislation has been changed, it is possible to establish audit committee for the share companies with the financial statements subject to a legal obligation to be audited. As we have mentioned before, the audit committee is formed of at least two members of the board of directors/supervisory board. At


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least one member of the audit committee should have experience in the accounting principle application or in financial audit area.

Based on those presented above we could come to the conclusion that to date the process of assimilating into the national legislation of the basic elements of the corporate governance, the role of the audit committees, the role of the internal audit and how this is organized is appropriate. Still, in practice a series of inconsistencies exist as far as concerns the categories of entities which are required to apply the corporate governance requirements, the role of the audit committee, the internal audit role as well as how it is organized, there are not provided sanctions for the entities which do not observe the legal provisions etc. This is the reason why we would like to point out some cases where the regulations on the governance can be considered as being inconsistent, or not clear enough:

1. The provisions of article 142 of the Law no. 31/1990 on the commercial companies, with the subsequent changes and additions, set for the board of directors a series of tasks which can not be delegated to the directors (e.g. establishing the accounting system and the financial control system). In reality, this means establishing the accounting policies at the level of the entity and its internal control system. We believe that how it has been put into the law it is not consistent with the accounting legislation and also can create confusions when it is about implementing it.

2. The Law no. 31/1990 with subsequent changes and additions regulates the possibility of creating the audit committee and of the internal audit for the entities with the annual financial statements subject to the financial audit.

According to the Order of the Minister of the Public Finance no. 2001/2006, implementing the provisions of the Directive 2006/46/CE into the national legislation, only the entities with the securities admitted to trading on a regulated market have the obligation to present the information on the corporate governance. We appreciate that the provisions only for these category of entities mentioned in the Directive 2006/46/EC is appropriate for the moment being for the Romanian economic environment. At the same time, we have to consider the provisions of the Directive no 2006/43/EC, which becomes effective starting with the year 2008, according to which the obligation to establish audit committees refers to the public interest entities, defined by each country by its own jurisdiction. For our country, the public interest entities have been defined first by the Order of the Minister of Public Finance no. 907/2005 and by the recent changes to the Accounting law by the Law no. 259/2007, the definition of this category of entities is set by the law.

3. The fact that the changes to the company law in the process of implementing the corporate governance principles ado not contain to date the minimal tasks for the audit committees lead to a series of risks concerning the not observance of the requirements of the Directive 2006/43/CE of the European parliament and Council of 17 May 2006 which set for the audit committees, among other, the following tasks:

- Monitors the financial reporting process, the internal control systems effectiveness, the internal audit, as case may be, and the risks management systems of the companies

- Monitors the statutory audit of the annual financial statements and the consolidated financial statements, reviews and monitors the statutory auditor independence or of the audit firm and mainly the provision of other services to the audited entity.

4. The Law no. 31/1990, with the subsequent changes and additions keeps the provisions concerning the censors, this being a particularity of the national legislation which is not supported by the acquis communitaire in the area, and for this reason we appreciate that a revision of the provision of the law concerning the censor institution is needed in order to bring it in line with the corporate governance principles.

5. Also, the provisions referring to „any shareholder has the right to refer to the internal auditors the issues they believe that should be reviewed” (Art.164 of the


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Law 31/1990), we appreciate that can influence the internal audit to be perceived as a review body outside the entity and implicitly can make harder the process of implementing a internal audit strategic function truly meant to add value to the entity.

6. The requirement set in the Emergency Government Ordinance no 75/1999 republished on the financial audit referring to those responsible for the internal audit to have the qualification as financial auditors generates some confusions between the internal audit function and the external audit one. In reality there are two separate professions, and the reasoning for the respective provisions and of its transitional character should be specified more clearly.

7. Not sanctioning by law the not observance of some provisions on the corporate governance (the not observance of the requirements on the audit committee composition, on organizing the internal audit etc) leads to the conclusion that the corporate governance principles are not implemented because only the assimilation in the national legislation of the respective requirements leads to the assimilation of the acquis communitaire in the area.

The issues presented reflects that the national legislation on the company law still contain some particularities which should be carefully reviewed and discussed by the qualified professional, so that the decisions for the review to be followed by their correct and consistent implementation.

Bibliography

The Fourth and Seventh Directives with subsequent changes and additions by the Directive 2006/46

The Directive 2006/43 on the statutory audit of the financial statements The Regulation no. 1606/2002 on IFRS implementation in the European Union The Acquis communitaire on the company law Law no. 31/1990 on the company law, republished in the official Monitor Part I, no. 1066

of 17 November 2004, with subsequent changes and additions (Law no. 441/2006 and EGO no 82/2007);

The Emergency Government ordinance no. 75/1999 of 01/06/1999 on the financial audit activity published in the Official Monitor, Part I no. 598 of 22/08/2003, with subsequent changes and additions;

Order of the Minister of Public Finance no. 1752/2005 on the approval of the accounting regulations conform to the European Directives, published in the Official Monitor, Part I no. 1080 of 30/11/2005;

Order of the Minister of Public Finance 2001/2006 on changing and addition to the Order of the Minister of Public Finance no. 1.752/2005 on the approval of the accounting regulations conform to the European Directives,, published in the Official Journal, Part I no. 994 of 13/12/2006;

Order no. 1121/2006 on the application of the International Financial Reporting Standards published in the Official Monitor, Part I no. 602 of 12/07/2006;

OECD- White Paper on Corporate Governance in South-Eastern Europe (the Stability Pact of the South East Europe Agreement for reform, investments, integrity and economic growth);

International Financial reporting Standards, CECCAR Publishing House 2007; International Standards on Auditing, CAFR Publishing House, 2006 “Audit financiar” Magazine-2007, Chamber of Financial Auditors of Romania


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INTERNATIONAL DIMENSIONS OF HUMAN RESOURCE MANAGEMENT

Cristian MARINAŞ Ph. D. Lecturer

Aurel MANOLESCU Ph. D. Professor

Academy of Economic Studies, Bucharest Abstract. In a global context it is necessary to redefine the role of human resources

department that has to offer to high level managers the necessary instruments to react on an international market, which is highly competitive.

Speaking about human resources management from an international perspective, it is also important to discuss about the development process of the multinational companies, which are the main way to transfer the managerial know-how between countries and regions. The globalization process is seen as a factor of success that allows the know-how transfer between different management systems. Human resources management becomes the main instrument that assures the competitive advantage for the companies. The strategic decisions of the managers must reflect in a high rate the engagement for people. The strategic role of human resources management is highlighted by the high level of integrating the human resources strategy in the global strategy. The human resources activities must be related with all other processes developed in the companies. Although, globalization is one of the factors that determine the success of multinational companies on a market in a continuous change, the multidimensional character of success generate some problems that organizations must face.

Key words: multinational companies; globalization process; human resources.

REL Classification: 10H

1. The necessity of developing an international perspective of human resources management

The increasing level of the international competition as a result of an amplified globalisation process and the improvements in administrating the human resources are realities that sustain the human resources management as one of the most important factors of organisational development, at a global level.

More and more companies are aware of the development of an international human resources management. It is already known that the development of an international company depends on factors like: the cultural diversity, the international workforce migration, the development of international market relations and international competition, etc.

It seems that there is a fake instability between the efforts to make international the human resources activities and the interest in this phenomenon. The accent focus on the first activity. The international activity of the companies and universities, as a result of globalisation, will also emphasize the content and the importance of the international human resources management.

The large number of the conferences and the symposiums related on international human resources activities and also the practical efforts made in this direction prove that the specialists, the managers, the researchers and even the students are very interested in this field. The existence of international human resource management in more and more


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companies is proving of the high recognition of these tendencies. The human resources department is one of the main factors of success in international companies.

The multiple effects of globalisation also concern the human resources, and the process of globalisation amplifies the international dimensions of human resource management. This is the reason why we are not surprised that a big part of the workforce is already working outside the national borders.

For example, half of the people employed by Ford Motor Company are developing their activities outside USA borders. 75% of the employees of Philips are working outside Holland. Another example are the employees of Matsushita Electric, more than half of them working in another country than Japan.

The three examples presented above determine us to state that we witness the development of a multicultural workforce, as a result of the interaction of different cultures.

For example, the high management of Unilever organisation is provided by managers with 30 different nationalities. Another example we can mention is the one of Du Pont organisation, which in 1991 had a president who was not American.

Developing an international activity suppose even the change of role of the human resource department of a company. Its main characteristics are:

• The ability to react in a high competitive market, in global businesses; • Tight bundles with the strategic plans of the company; • The managers and the employees are both involved in defining and implementing

the business objectives; • The accent on quality, customer relationship, productivity, team working,

workforce flexibility. In order the human resource managers to become the central element in all the

activities of the organisation, the department of human resources must have strong relations with the high management of the company.

The main concern of the companies is to locate and identify the human resources who can assure the competitive advantage in an international environment.

In this respect, we can mention what Duerr M.G. (Dowling, Schuller, Welch, 1993,: p.2) stated:

“Any kind of problem, national or international, is created by humans and finally solved by people. Therefore, having the right people at the right time is the key to international success. If we can solve this issue, than we will be capable to solve, faster and easier, all the other issues.”

Also Dowling P. and Schuler R. stated that one of the main factors that make a distinction between human resource management and international human resource management are the employees from multinational companies. That means that the international human resource management also incorporates the other human resource management functions. In numerous situations it is underestimated the complexity of the managerial practice in human resources domain in the multinational companies. Desatnick and Bennet (Manolescu, Lefter, Deaconu (editors), Marinas 2007, p.136) stated that:

“The main cause of the failures of multinationals has its origins in the lack of understanding the essential differences between the practices of human resource management in different countries, at every level. The managerial stiles from different multinational companies proved their efficiency in one country, but outside its borders they only led to frustrations and worse achievements. To gain international competitive advantage, a company must take into consideration, not only the financial and marketing issues, but mostly the workforce aspects.”

The whole world companies are aware that in order to survive, they must be competitive on an international market, deal with a strong competition from every point of view. The organisations must develop global markets, deal outside competition and most of all to hire a variety of workforce.

There are studies made on successful worldwide organisations that show that not only they operate on an multinational scale, but they have a workforce and an organisational culture that reflect the “global market”. These companies like General Electric, Coca-Cola, Microsoft, Walt Disney, Intel, consider people the most important resource and hire at least a part of the employees


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from the country they operate. Many times, when they expand their activities in a foreign country, the multinational companies choose to send their managers to implement the know-how and the economic principles existent at the level of the mother company. The organisations must be prepared to relocate employees. This requests human resources expertise in order to select the suitable persons. The workforce that migrates through multinationals are named expatriates. That is how people migrate through multinational companies.

Some organisations invest in underdeveloped countries because there are a lot of people with a high productive potential, people who also accept smaller wages.

A multinational organisation must enclose the cultural differences and the managerial practice existent in the host country. Although many times the employees are not familiarised with the new technology and the principles of the company, finally it seems to be a profitable business.

The international spreading of the activities of human resources management is translated in special in the transfer of managerial know-how from one country to another, at the level of multinational companies and their subsidies, no matter the dimension of the activity.

2. The impact of globalisation over the human resource management

The specialists in strategic management like Floyd D. (Perkins, 2003, p. 462) analyse the process of globalisation through the competitive advantage gained by a company that enlarge its activity at a global level. Analysing this definition, one may conclude that the specialists in strategic management underline the fact that a company can obtain competitive advantage if its activity fulfils the efficiency criteria and the human resources costs are reduced. Beyond the influence of some factors like the free movement of workforce and goods, these are the most important criteria that multinational companies consider when they extend their activities making new subsidies in other geographical areas.

The process of globalisation influences more or less the directions of development of every organisation. From human resource management point of view, we must clarify the next issues: Can we consider globalisation and human resource management as compatible partners? How much are they influencing each other? Are their objectives convergent? Is the globalisation process involving the harmonisation the human resources systems of each different country?

In the opinion of some authors like Ramirez M. and Mabey C. (Ramirez, Mabey, 2000, p. 89), the objective of globalisation is to obtain the success of the business through valuing efficient the managerial abilities and understanding the cultural differences of every country. Other specialists (O’Keeffe, 2003, pp. 233-243) consider that, beyond the expansion of the activity of the companies outside national borders, the success of the business in a global context is secured by an efficient human capital management. That means that the human capital investments are the main premise that the companies must value in order to maintain competitive advantage.

In the context of globalisation, the human resources must be regarded as investments. The organisations that will consider the human resources as an imposed cost will have little chances of business success. Keep E. stated that “the companies that consider their own employees a simple cost and do not invest to develop people, can not say that they practise a human resources management”. The most important aspect that the responsible factors must understand is that globalisation destroys the national borders and the people are the main factor that brings adaptability and flexibility. In the opinion of the human resources specialists (Smith 2000, p. 82) the competence level of the human resources managers strongly influences the integration process of the human resources strategy in the global strategy of an organisation.

Human resources management becomes the main tool and means of the organisation to gain competitive advantage. The strategic decisions of managers must reflect in a high proportion the commitment to people. The absence in organisations of human resources strategies makes impossible their international adaptation to environmental changes. There is a high connection and dependence between the human resources activities and all the other processes in an organisation because, in a global era:


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“People and not the organisations make the adaptive mechanism that determine the way the companies react to environment. Human resources management, as a strategic process, is much more difficult than promoting technical progress or the lack of financial resources. The organisations that learned how to lead their people through competitive human resources management are “older” than others because bringing and maintaining the quality of human resources are strategic processes. (Kathri, 1999).

3. The role of human resources management in an international context

In the context of international businesses, the human resources department has a key role in developing the strategy, acting like a “strategic partner”.

The increasing competitiveness is highly related to the development of a strategic human resources management. This kind of tendency developed as an answer to a highly dynamic environment, most of organisations including the human resources function in the global strategy because people can definitely influence the success of an organisation.

In what concerns the role and the importance of the human resources department in multinational companies, the human resources specialists agree with the idea that the human dimension must be amplified and integrated inside every organisation. Other specialists state that the tendency of spreading out the human resources activities considerably diminish the role and the importance of the human resources function inside multinational organisations. This kind of opinion is sustained by authors like Tyson S., Fell A. and Millward N. (Kelly, 2001: pp. 536) (fig.1) who promote the idea that the strategy and the human resources policies are not integrated inside the general policy of the organisations because they are made on a short term. The model of the “functionary” (Manolescu, Lefter, Deaconu (editori), Marinas 2007: pp. 61) emphasises that the managers from different hierarchy levels have the whole authority to act. The speciality literature also synthesises the opinions of other authors like Scullion H. and Starkey K. (Kelly, 2001, pp. 536-537) (figure 1) who sustain the strategic role of human resources management in multinational companies.

The human resources function made remarkable progresses even in the organisations where the activities of human resources are decentralised, in domains like: human resources development, career management (succession planning) and motivation.

Eroare!

Figure 1. Human resources function in multinational companies The Donovan report and its recommendations also sustains the increasing importance

of the role of human resources department. (Turner 1969, pp. 1-10). In 1968, Lord Donovan propose to make in every company a commission responsible with the collective negotiations and the industrial relations. The coordinators of these processes were also part of the leading committee of each company. Based on the recommendations made by the commission of Lord Donovan, in Great Britain was founded The Commission for Industrial Relations whose main field of activity is collective negotiations.

The strategic role of the human resources function in multinational companies is also emphasised by Kelly J. (Kelly, 2001, pp. 537) (figura1) who sustains that the presence of human resources managers in the council board of multinational is the most important prove of their implication in the process of adopting strategic decisions.

The role and the importance of HRM in

the mother company

1960 1970 1980 1990 2000

Tyson S., Fell A., Millward N. Scullion and Starkey

Kelly J.


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The international activity of the companies in order to obtain competitive advantage is encouraged and sustained through different means (for example: decreasing a certain taxes, facilities to enter the market, assistance in the process of implementing the investment projects, monitoring the business environment, etc.) by the host country governments. The presence of multinational companies brings a lot of advantages for the host country:

• The increasing of competitiveness and competition in the host country; the national companies must adapt to the exigencies imposed by the multinational companies;

• Promoting technical progress; • New work places; • The improvement of the occupation degree; • The improvement of life standards; • The diversification and the continuous improvement of human resources practices, etc. The expansion of multinational companies activities can be emphasised by the

statistics (Kelly, 2001, p. 540). For example, the multinational companies have 20-25% of the production activity at a global level, no matter the field of activity. In United States of America and Japan, the multinational companies realise 50% of the trade activity. The data delivered by The American Bureau for Economic Analyse (McNeill, 2005, pp. 32-39) state that 7 countries make 80% of the whole volume of the foreign investments in USA: Japan, Great Britain, Switzerland, France, Canada, Deutschland and Holland. More than that, the European multinational companies make 66% of the total direct investments in USA.

The globalisation of the markets and business determined the amplification of the role of human resources in organisations. Therefore, it is absolutely necessary to formulate a human resources strategy, enclosed in the global organisational strategy, in order to develop international managers. In this context, the activities of developing human resources will have an increased importance and also the career management. Perlmutter H (Perlmutter, 1969, pp. 9-18) sustained that in the initial phase of development, the multinational companies must adopt an ethnocentric approach, the expatriate managers being transferred in the subsidies of the host countries in order to implement the strategies and the politics developed in the mother country.

After a while, after the subsidies from the host country develop, the mother country control becomes more and more reduced and the ethnocentric approach is substituted by the polycentric or the regiocentric approach. Step by step, the mother country adapt its politics to the ones of the subsidies, the expatriate managers are replaced by national employees. Harzing A. (Harzing, 2001) sustains that the relation between the stage of development of the subsidies and the mother country approach, developed by Perlmutter H., is specific for the USA and Great Britain multinational companies, while the Japan and German organisations maintain a strong influence over the subsidies.

Generally, the mother company maintain a high control over the main strategic domains like quality management and the financial resources, the promotion of the technical progress.

The frequency of the changes in the activity of multinational companies requests a good human resources management at the level of the mother company and also in subsidies. The strategies and the policies of the mother company must assure, maintain and develop capable managers who can coordinate the international human resources activities: recruitment and selection, the development of the human resources, career management and motivation. Expatriate managers are the link between the mother company and its subsidies and they must identify themselves with the mission and the values of the mother companies in order to implement them inside the subsidies. The human resources department of the subsidies develops human resources strategies and politics adapted to the local culture. The managers of the subsidies are directly coordinated by the human resources department of the mother company.

The important role that the human resources department has in developing the global strategy of the multinational companies is also emphasised by a series of studies (Kelly, 2001, p. 542). In 73% of the cases, the human resources department is represented in the council board and the managers contribute in elaborating the global business strategy. The statistical data also prove that in 91% of the multinational companies there are well developed human resources strategies and policies.


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In the global era, the culture became a strategic factor that must be efficiently administrated in order to obtain performance. The values, the norms and the attitudes of the company must be a favourable environment for flexibility and adaptability. One of the main requests of an international activity is to have managers that are culturally well prepared to apply and administer the cultural elements and values specific to each country.

Although the international activity determines an increasing in the role and the importance of the human resources department, we do not have to omit the fact that the globalisation process brings also a lots of problems:

• The international migration of the workforce in more developed countries; • The problems related to the development of expatriate managers, familiarised with

the host country culture; • The differences between the objectives of the human resource strategy and the

labour legislation of each country; • The costs of bringing back the employees from subsidies; • The terrorism; • Some controversies in the actions of the host country governments and the

restrictions for multinationals, for example a minimum gross salary; • The reduction in the number of the workplaces as a consequence of the new technologies; • The reduction of the workplaces may generate poverty, chaos and social strikes; • Globalisation may lead to a decrease in social protection; • The unemployment that may develop in different countries. Although nowadays there is a dispute regarding the advantages and the disadvantages

of globalisation, the universalism tendency is visible. The powerful is the one that dominates a certain sector at a global level, the one that has the newest techniques, the one that use any means to obtain certain effects. Almost 80% of the global population speaks English although nobody imposes that. English becomes a common language to communicate at a global scale. This is for sure a internationalisation issue, isn’t it?

By its nature, the globalisation has a multidimensional character as it concerns different domains that define the peoples’ lives: economic, social, politic, military, technology, culture.

Bibliography

Chviu, I., (2003). Dimensiunea europeană a managementului resurselor umane, Editura

Luceafărul, Bucureşti Dowling, P., Schuller, R., Welch, D.E. (1993). International Dimensions of Human Resource

Management, Second edition, Wadsworth Publishing Company, Belmont, California Floyd, D., “Globalization or Europeanization of business activity? Exploring the critical issues”,

European Business Review, vol. 13, no. 2 Granell, E., “Culture and Globalization: a Latin-American challenge”, Industrial and Commercial

Training, vol. 32, no. 3, 2000 Harzing, A., “An analysis of the functions of international transfer of managers in MNCs”,

Employee Relations, Vol. 23, no. 6, MCB University Press 2001 Kelly, J., “The Role of the personnel/HR function in multinational companies”, Employee

Relations, vol. 23, no. 6, MCB University Press, 2001 Manolescu, A., Lefter, V., Deaconu, A. (editori), Marinaş, C. – „Managementul resurselor umane,

Editura Economică, Bucureşti, 2007 McNeil, R.L., “Foreign Direct Investment in the United States: New Investment in 2005”, Survey

of Current Business June 2006, www.bea.gov Perkins, S., “Globalization and IHRM: partners in comparative perspective”, Journal of European

Industrial Training 27/9/2003, MCB UP Limited Perlmutter, H.V., The tortuous evolution of the multinational corporation”, Columbia Journal of

World Business, vol. 4, no. 1, 1996 Turner, H.A., “The Donovan Report”, The Economic Journal, vol. 79, no. 313, Royal Economic

Society, 1969


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CONTRIBUTIONS REFERRING TO A TERRITORIAL MODEL FOR DEVELOPMENT OF THE ECONOMY

BASED ON KNOWLEGDE (METHODOLOGICAL FRAMEWORK)

Mihail DUMITRESCU Ph. D. Professor

Lavinia ŢOŢAN Candidate Ph. D.

National School of Political Studies and Public Administration, Bucharest

Abstract. This paper presented a short evolution of the concepts until the knowledge economy. It is mentioned the filosofy of the research which containts: the objectives of the

projects, the changes in the preparation levels of human resources, the evolution of informational processes. The model also containts the determination of the characterizing indicators for the knowledge economy at territorial level with the computing relations, and also the evaluation on statistical bases.

Finally, it is proposed a territorial model based on the dates’ interpretation from the following table:

Current number

Units analysed

The values for the indicators of knowledge

economy Ii

The grade of importance for the

indicators Gi

The synthetic aggregate indicator

Isa

The relation for Isa proposed is: (1) Isa=ΣIixGi, in which (2) Gi has three classes of importance A, B, C which differentiate the 9 indicators. Referentially, we will use either maximum Isa or the maximum of the value of the

indicators Ii and using that we will generate a maximal value Isa. Key words: knowledge economy; indicator; territorial model.

The concept of knowledge economy has evolved in time, starting from the research

that has established in turn that: • Knowledge Industry that pointed out that the future belongs to those industrial

areas based on knowledge, innovation and the development of the conceptual activities. In our research(1) we have stressed that in economy “knowledge as the highest quality

associated with the anticipation and mastering of the changing phenomena, of the challenges that arise at every stage, is one of the main factors of the economical and social success.

• Knowledge Management was the second element that proceeded the approach of the problems of the knowledge economy. The first international conference and exhibition in this area took place in Brussels between the 20th and the 22nd of December 2000.


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The key message of this meeting emphasised by Robert Taylor and Unisys was “Europe's future is the knowledge economy”.

At this event it was affirmed that: “The launch of Europe's largest Knowledge Management event (KM) reflects the dynamic change in the industry. Knowledge Management has matured beyond simply being another management buzzword and is widely viewed as a critical element of a company's long-term business strategy. Companies now understand the importance of actively pursuing KM-led initiatives and incorporating KM into their company structure”.

The content of the Skandia Model (see figure 1) is a relevant illustration of the evolution of the knowledge-based economy.

+

+

+

+

Figure 1. Market value structure of the national intellectual capital (The Skandia Model) In summary, we could affirm that: • The financial capital reflects the history and achievements of a nation; • The process capital and market capital are components that the present economic

operations of a nation are founded upon; • The modernisation and development capital reflects the way in which a nation

prepares for the future; • The human resources capital represents the core of the value structure of an

economy. It is included in the capacities, expertise and wisdom of the individuals as it represents the lever needed in the value creation process, starting from the other components. This is the key element of the knowledge-based economy.

A relevant step in the pursuit of a knowledge-based economy is represented by the recommendations drawn up by the World Bank Institute and OECD in a country study published in 2000 and named “Korea and the Knowledge-Based Economy: Making the Transition” where there are presented some directions of action in the transition towards a knowledge-based economy(2):

• To strengthen the intellectual property rights, to promote the intangible assets valorisation;

• To take the political measures necessary for encouraging the competition (competitive enterprises are focused more on innovation);

• Managerial and curricular reform in the university system; • To encourage a greater interrelation between firms, universities and public research

programs;

Market value

Financial capital

Human resources capital Structural capital

Intellectual capital

Market capital Organisational capital

Process capital Modernisation and development capital


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• To allocate resources to universities. An essential element in promoting knowledge-based economy is represented by the

Lisbon Strategy that dedicates reforms to five areas: • Knowledge society; • Internal market; • Business environment; • Labour market; • Environmental protection. In Romania the global and sectorial approaches are represented by the Project

“Knowledge-Based Economy” initiated by the Romanian Government through the Ministry of Information Technology and Communication, promoting the development of The Electronic Networks in the Local Communities (ENLC) in 200 communities considered disadvantaged in regard to their access to knowledge.

The global goal of the Project is to facilitate the involvement in the knowledge society of the disadvantaged communities according to the governmental strategy for the European Union integration.

Specific goals of the Project are: • To reduce the discrepancies in the education TIC at the whole population level; • To provide access of the citizens to the information, in digital format, through

ENLC; • To offer public electronic services at the rural communities level; • To provide the mechanisms for encouraging the entrepreneurial initiatives on the

Romanian territory. The Project approach is mainly informational. Finally, for the broader area of the knowledge-based economy in 2005 the paper:

“The Economy, the Firm and The Knowledge-Based Management” by Ovidiu Nicolescu and Luminiţa Nicolescu was issued by the Economic Publishing House. The book has a message that is at the same time theoretical, methodological and of practical action in this field.

The “knowledge-based” approach has raised comments starting from the fact that only applied knowledge can generate the process of knowledge.

The proposed project “Territorial model of the development of the knowledge-based economy and the impact on the quality of the labour force”, utilising the researches and studies carried out until now, presents a new view in which the informational, economical, managerial, social and technological aspects are combined. Moreover, applying the model at territorial level has an original character, the interdisciplinary focus being noticeable.

As the exploratory research category is defined, beyond the scientific pursuit, the purpose is oriented towards the influence of this approach on the quality of the labour force, on its flexibility and mobility.

The objectives of the project are firstly represented by researching the way that a “Territorial model of the development of the knowledge-based economy and the impact on the quality of the labour force” can be elaborated, in an interdisciplinary manner.

One of the objectives will be represented by the utilization in a territorial, original context of the achievements accomplished until now at a national and international level.

Since the research is conducted at the territorial level an objective will be to determine the measures that have to be taken for drawing up in a short period of time the knowledge-based economy and its impact on the quality of the labour force.

The territorial model will be localised at a city level and it could then be extend at other organisational levels based on the methodological content of the proposed project.


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The philosophy of the research materialized in its methodology is represented in figure 2.

An important component of the research methodology is represented by determining the specific indicators (see p.5, figure 2) presented in figure 3 as well as the mathematical formulas of the indicators for characterizing the knowledge-based economy that are presented below.

Figure 2. Methodology of research

2. The objectives of the project

3.1. Knowledge and informational process development 4. Conceptual clarifications regarding knowledge-based

economy. Specific elements at the territorial level

3.2. –Changes in the training levels and competences of the human resources;

-Development of the capitalization capacity of the knowledge processes;

- Openness towards innovation;

- Intellectual labour weight growth.

1. Territorial model of the development of the knowledge-based economy and the impact on the quality of the labour force

5. Determining the indicators for characterizing the knowledge-based economy

6. Statistic assessment of these indicators at territorial level

7. Characterising of a representative sample of the enterprises regarding the knowledge-based economy requirements

8. Developing a territorial model that includes the relationships between the indicators and the requirements for achieving the knowledge-based economy

9. Capitalization of the model content regarding the quality of the labour force


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Figure 3. Specific indicators for knowledge – bad economy The mathematical formulas of the indicators for characterising the knowledge-based

economy are presented as follows:

5.1. employees ofnumber Total

computers ofNumber endowment n informatiofor indicator The =

Total volume of expenditure for

training and/or improvement of the staff 5.2.

The indicator of continuous training (average on the last three

years) =

Total number of employees

Number of employees with high education x K1 + Number of

employees with medium education x K2 + Number of employees with low

education x K3

5.3.

The average cultural indicator regarding employees training

= Total number of employees

K1 = 15, K2 = 12, K3 = 8

5. Determining the indicators for characterizing the knowledge-based economy

5.1. The indicator for information endowment

5.3. The average cultural indicator regarding employees training

5.5. The performance synthetic indicator

5.2. The indicator of continuous training (average on the last three years)

5.4. The indicator regarding labour productivity level

5.6. The investment volume in RDI

5.7. The indicator regarding export value per employee

5.9. Renovation degree of the products, services and technologies (average on the last three years)

5.8. The permanent programmed education index (average on the last three years)

5.10. Adjustment factors in the territorial model


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5.4. The indicator regarding labour productivity level = employees ofnumber Total

added valueAnnual

5.5. The performance synthetic

indicator (average on the last three years)

= Profit =1 Loss=0

5.6. The investment volume in RDI = 100investment Total

RDIin valueInvestment×

5.7. The indicator regarding export value per employee = employees ofNumber

export theof valueannual Total

5.8.

The permanent programmed education index (average on the last three years)

=

Annual number of staff covered by the training and/or improvement programmes × 100 Total number of employees

Number of new products, services and technologies annual achieved

5.9.

Renovation degree of the

products, services and technologies (average on the last

three years)

= Total number of products, services

and technologies used The computational system of the synthetic composite indicator for the position of the

firms relative to the knowledge-based economy will be as follows:

Current number Analysed units

Values of indicators for characterising the

knowledge-based economy Ii

Importance degree of the

indicators Gi

Synthetic composite indicator

Isa (1) Isa=∑ × ii GI where

(2) Gi has three classes of importance A, B and C Group A includes 4 factors: 5.1, 5.3., 5.6., 5.4; Group B includes 3 factors: 5.9, 5.7., 5.5; Group C includes 2 factors: 5.8., 5.2.

Referentially, we will use either maximum Isa or the maximum of the value of the

indicators Ii and using that we will generate a maximal value Isa.

Notes

(1) Mihail Dumitrescu, „Le role du management face aux difficultes de la transition L'Article pour L'Association Internationale des Economistes de langue francaise, Congres de Bucarest;

Mihail Dumitrescu "Rolul managementului în perioada tranziţiei la economia de piaţă. Conceptul post-privatizare", Communication at the Congress "Ştiinţa la sfârşit de mileniu" 22-24 of May 1996, Bucharest

(2) Marin Apetroae, “Către o economie bazată pe cunoaştere”, UEFISCSU, Bucureşti, 2002


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AN ANALYSIS OF THE RE-ALLOCATION OF INVESTORS BETWEEN FOREIGN DIRECT

INVESTMENT AND FOREIGN PORTFOLIO INVESTMENT AFTER EUROPEAN INTEGRATION

Gabriela PRELIPCEAN

Ph. D. Professor Elena HLACIUC

Ph. D. Professor Mircea BOŞCOIANU Ph. D. Senior Lecturer

Mariana LUPAN Candidate Ph. D. Lecturer

University “Ştefan cel Mare”, Suceava Abstract. There are two major types of international equity flows. In the economic

literature there are only few publications in the field of explaining bilateral correlation between Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI) in a robust analytical framework. We consider Lipsey-Razin model to highlight the major differences between the two types of investments (FDI with better control and supervision versus FPI with less control over domestic firms).

The re-allocation of investors between FDI and FPI after European integration is very interesting especially in the context of euro macroeconomic cyclicity which leads welfare parameters an early withdrawal.

Key words: FDI; FPI; re-allocation of investors; European integration;

macroeconomic cycle.

1. Introduction The main types of international equity flows are: Foreign Direct Investments (FDI) and

Foreign Portfolio Investments (FPI). In the literature there is only few references which explain the correlations between FDI and FPI. We propose an analysis of the global evolution and future trends of FDI vs FPI in Romania after European integration.

We use Lipsey-Razin model of a trade off between FDI vs FPI which highlights the differences between the two types of foreign investment. FDI flows are less volatile because of the long term investment and the illiquidity, but these investors have a higher control of the management than FPI investors, who delegate decisions to managers. FDI investors get more information about the fundamentals and manage the projects more carrefull based on a more robust monitoring, and this fact generates a better added value.


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The costs associated to FDI are: the initial fixed costs (especially for Greenfield investments, terrain acquisition,

building, training, could be considerable); the information-based costs, exogenous and resulting from the capacity to sell

quickly their investments before maturity (in liquidity shocks, potential buyers will pay only a lower price because they suspect an assimetrical information on the prospects of investments).

These costs are also driven by the volatility and liquidity and depend on the macroeconomic context but also on the turbulences existing on international financial markets. The difficulty of FDI withdrawals (the Akerlof lemon type problem) may create a bias of less illiquidity-prone investors, such as big multinationals. Institutional investors, who are subject to frequent withdrawals, are biased in favour of FPI.

By using Lipsey-Razin model we could analyze the trade-off between management efficiency and liquidity which have strong empirical evidence; we also add the effect of asymmetric information for different types of control. The increasing of the control increases also the efficiency and value of the firm (Perez-Gonzalez, 2005). There is also a positive response on the capital market (Chari, Ouimet, Tesar, 2007).

Big FDI investors can achieve effective control by holding a block that is much smaller than the majority, but the value of the firm may increase at similar rates. The sale of big blocks by control holders (Rasdaq companies after increasing their capital in the summer of 2007) generates a larger price impact than a sale by other investors, because of a bigger downward effect on the price (Mikkelson, Partch, 1985; Holthausen, Leftwich, 1990; Chan, Lakonishok, 1995). The global price impact of sale in the presence of control can be obtained by analyzing what happens after the firm sells a part of its own shares in the asymmetric information environment (Flamingo, Armax Gaz Medias, Albalact, Prospectiuni, Ceramica Iasi).

An interesting implication of the trade-off between efficiency and liquidity is that investors with high/ vs. low expected liquidity needs are more likely to choose less/ vs. more control. The mechanism is based on the fact that investors with high expected liquidity needs are affected more by the low sale price associated with control, whereas those with low expected liquidity needs are affected more by the efficiency in management. In this case, the assets under control are less likely to be liquidated prematurely (Hennart, Kim, Zeng, 1998). Big investors are much more likely to exit from joint ventures than from fully owned investments with more control. FDI exhibit more control than FPI which expected to be liquidated less often, in the global context of international portfolio management. The instruments of FPI could be: a direct investment in local stock exchange (blue chips, Investment Financial Companies- with balanced portfolio, IPO hunting) or by using a special vehicle of investment like open end investment funds/ close /end investment funds managed by financial intermediaries.

2. The selection from the existing models in the literature Albuquerque model explain the differences between the volatility of FDI versus the

volatility of FPI, but is not considered the effect of liquidity and the macroeconomic facts or the international financial environment. Albuquerque is focused on the expropriation risks and the inalienability of direct investments, and thus is different from the information-based mechanism.

In other papers related to FDI, it is used the asymmetric information hypothesis (Froot, Stein, 1992; Klein, Rosengren, 1994; Klein, Peek, 2002). The authors use the hypothesis that FDI is information intensive, and thus FDI investors, who know more about


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their investments than outsiders do, face a problem in raising resources for their investments. Gordon, Bovenberg (1996) use the asymmetric information between domestic investors and foreign investors to explain the home bias phenomenon. Razin, Sadka, Yuen (1998) explain the pecking order of international capital flows with a model of asymmetric information. A new model of Razin and Sadka (2005) analyze the gains from FDI when investors have superior information on the fundamentals, relative to FPI investors. All these analyze could not considere the effects of asymmetric information on the liquidity of FDI and FPI, which is a very important aspect.

3. The Lipsey-Razin model In this model there is a small economy faced by a continuum [0, 1] of foreign risk

neutral (the optimality is to maximize ex ante expected payoff) investors with the opportunity to invest in one investment project, FDI (in this case he acts as a manager)/ FPI . The timing (0, 1, 2) is the following:

in period 0, each investor selct the type of investment (FDI/FPI); in period 1, after the realization of the productivity shock, the manager of the

project observes ε and chooses K, so as to maximize the net cash flow; in period 2, the project matures.

The net cash flow from the project is R(K, ε), where ε is a random productivity factor that is independently realized for each project in period 1, and K is the level of capital input invested in the project in period 1, after the realization of s. For tractability we assume that R(K, ε) takes the special form

( ) ( ) 2

211, BKKKR −ε+=ε . (1)

We assume the cummulative distribution between (–1, 1) and a density function ( ) ( )⋅=⋅ 'Gg ; E(ε) = 0; B,is the production cost parameter and reflects higher production costs and lower productivity gaps.

3.1 A better management and efficiency for FDI In period 1, the chosen level of K to optimize the net cash flow is denoted by K*(ε)

( )B

K ε+=ε

1* . (2)

Thus, the ex-ante expected net cash flow from FDI held until maturity, is given by

( )( ) ( )( )B

EB

BB

E211

2111 22

ε+=

⎟⎟

⎠

⎞

⎜⎜

⎝

⎛⎟⎠

⎞⎜⎝

⎛ ε+−

ε+ε+= . (3)

In the case of FPI, the owner is not the manager, does not observe ε and follows earlier instructions as for the level of K. A possible rationale behind this sequence of firm decisions, whereby the level of capital input K is determined ex ante, has to do with a potential agency problem between the owner and the manager to maximize the ex-ante expected payoff

( ) ( )BB

EBB

E21

221

211

=ε+

=⎟⎠

⎞⎜⎝

⎛ −ε+ . (4)

It results a higher payoff in FDI but we muts consider the costs: the fixed initial costs (FDI cost) and the information-based cost, derived endogenously in the model from the possibility of liquidity shocks occurring in period 1.


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3.2 The effect of liquidity shocks Let X the probability of liquidity shocks that could forced early withdrawals. Let a

community with two types of investors, ½ with high expected liquidity needs (type H), and ½ with low liquidity needs (type L). We assume for the probabilities

associated 0211 >λ>λ> LH , 1=λ+λ LH . Investors know their type ex ante, but this is

private information. There is also a possibility to liquidate the project in period 1 even if there is no

liquidity shock which generates another cost associated to FDI. The price of resale in period 1 is equal to the expected value of the project from the point of view of the potential buyer. We denote the maximum level of ε, under which the FDI investor is selling by Dε . We denote by

Dλ the probability that an FDI investor gets a liquidity shock. Both Dε and Dλ will be endogenously determined in equilibrium. Given that FDI owner is selling, the buyer thinks that with probability ( ) ( )DD G ελ−1 the owner is doing so due to a low realization of ε, and

with probability Dλ that she is selling the projects because of a liquidity shock. Using Bayes's rule, the period 1 price that the direct investor gets for the project is given by

( ) ( ) ( ) ( )( ) ( ) DDD

ADD

AD

D G

dgdgP

λ+ελ−

εελ+εελ−= ∫∫ −

ε+ε

−

ε+

1

11

1 221

1 2

21

,1 . (5)

The initial owner, sets the threshold level Dε , such that, given DP ,1 while observing Dε :

( )B

P DD 2

1 2

,1ε+

= . (6)

From (5), (6) we determine Dε and DP ,1 as functions of the market-perceived

probability Dλ , denoted by ( )DD λε and ( )DDP λ,1 which are increasing in Dλ (when Dλ

is high, the buyer thinks that the probability for early sale results from a liquidity shock and not from a bad realization of the productivity parameter and the resale price is high). A consequence is that investors have a greater incentive to choose FDI in period 0, when the market participants think that investors with high liquidity needs choose FDI.

When a FPI investor sells in period 1, everybody knows that is due to a liquidity shock. The price is given by

( )B

dgB

P D 21

2211

1,1 =εε

ε+= ∫

−

. (7)

It was demonstrate that the resale price in period 1 of FDI is always lower than the resale price of FPI, and this is also a consequence of the liquidity.

Conclusion: FDI enables a morev effective management that increase the return but early resale

imply a low price because potential buyers perceive the negative inside information about the prospects of the investment. In addition, FDI entails a fixed cost C. Based on this trade-off FDI/ FPI investors select the investment that maximizes their ex-ante expected net cash flow.


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4. Ex-Ante Choice between FDI and FPI 4.1 Expected Value of FDI With ( )LHii ,=λ probability, a type i investor gets a liquidity shock and sells the

project in period 1 at the market price:

( ) ( )( )B

P DDDD 2

1 2

,1λε+

=λ .

With probability iλ−1 , the investor does not get a liquidity shock. The investor sells if the realization of e is below ( )DD λε according to eq (5), (6). The expected payoff in the state of no liquidity shock is

( )( )( )

( ) ( )( )

( ) εεε+

+εελε+

∫∫λε

λε

−

dgB

dgB

DD

DDDD

1 2

1

2

21

21

.

In addition, FDI investor has to incur a fixed cost of C and the ex-ante expected net cash flow is:

( ) ( ) ( )( )( )

( ) ( )( )

( )

( )( )C

B

dgB

dgB

BEV

DDi

DD

DDDD

iDiDirect

−λε+

λ+

+⎥⎥⎥

⎦

⎤

⎢⎢⎢

⎣

⎡εε

ε+=εε

λε+λ−=λλ ∫∫

λε

λε

−

21

21

21

1,,

2

1 2

1

2

(8)

4.2 The expected value of FPI investments

When the investor holds the FPI with probability iλ , in a liquidity shock with

resale in period 1 the price is:

BP P 2

1,1 = .

With probability iλ−1 the investor does not receive a liquidity shock and the expected net cash flow is:

( )BB

E21

221

=ε+ .

The ex-ante expected net cash flow from a portfolio investment is given by

( )B

BEVPortofolio 21

= . (9)

4.3 The differences between the expected value of FDI and FPI This difference between the two expected values is:

( ) ( ) ( )BEVBEVBDiff PortofolioDiDirectDi −λλ=λλ ,,,, (10) and the choice FDI vs. FPI is governed by the parameters B and C. Investor i is more likely to choose FDI when: the FDI cost C is lower; the productivity cost B is lower; the probability of a

liquidity shock Xt is lower, the market-perceived probability Dλ of a liquidity shock for FDI investors is higher.


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5. The allocation of investors between FDI/ FPI To describe the equilibrium, it is necessary to specify Dλ . If Dλ is in line with the

equilibrium choice of investors between FDI/ FPI:

FDILFDIH

FDILLFDIHHD

,,

,, ,,λ+λ

λλ+λλ=λ . (11)

where FDIH,λ is the proportion of Hλ investors who choose FDI in equilibrium and

FDIL,λ is the proportion of Lλ investors who choose FDI in equilibrium. There are five cases

at equilibrium: all Hλ and Lλ investors choose FDI.; all Lλ investors choose FDI and Hλ investors split between FDI and FPI; all Lλ investors choose FDI and all Hλ investors choose FPI.; Lλ investors split between FDI and FPI and all Hλ investors choose FPI.; all Hλ and Lλ investors choose FPI.. In real economies FDI and FPI coexist. The differences between expected liquidity needs for a representative FDI investor and those for a representative FPI investor depends on volatility, liquidity, macroeconomic situation and international financial picture. In Figure 1 is presented a

full characterization of the equilibrium allocation of investors as a function of Hλ the probability that investors with high expected liquidity needs will get a liquidity shock, and B.

Eroare!

Figure 1. The allocation of investors between FDI and FPU 6. Conclusions The model describes an information-based tradeoff between FDI and FPI investments.

FDI investors are more informed about the fundamentals of their projects and this information enables them to manage their projects more efficiently. It results also an asymmetric-information problem in case they need to sell their projects permanently, and reduces the price they can get in that case. As a result, investors who know they are more likely to get an idiosyncratic liquidity shock that forces them to sell early are more likely to choose FPI, whereas investors who know they are less likely to get a liquidity shock are more likely to choose FDI. The model generates several results that are consistent with empirical evidence in Romanian economy which attracted larger shares of FPI after EU integration. Romania supplies a lower labor costs that make high added value business more profitable. After integration, the high transparency of the capital market makes FPI more efficient, in the context of reducing FDI after BCR privatization. The model can account for the high observed

Case 1

Case 1, 2, 3

Case 3

Case 5

Case 4

( )BH***λ( )BH

**λ

( )BH*λ

1/2 B* B

Hλ


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withdrawal rates of FPI relative to FDI, which also contribute to a high volatility of the former relative to the latter. It is also observed that increasing transparency implied smaller differences between the withdrawal ratios of FPI vs. FDI. It is interesting to remark the behavior of Romanian capital market after subprime crisis in US. The capacity to attract more investors with low expected liquidity needs to FPI is in danger now and it coul also result a separation between investors with low expected liquidity needs and those with high expected liquidity needs.

From the model the main conclusions are: 1. The expected liquidity needs of FDI investors are lower, on average, than the

expected liquidity needs of FPI investors. Liquidity shocks are more common among FPI than among FDI investors. Investors with high expected liquidity needs and speculators are not interested about the long-term efficiency of FDI, and care more about the short-term price, having a higher tendency to invest in FPI. Investors with low expected liquidity needs, often the big investors, and multinational corporations prefer FDI. FPI investors (investment funds) are more vulnerable to liquidity shocks. This result contributes to the high withdrawal ratio of FPI relative to FDI, which can account for the empirically observed higher volatility of net FPI inflows.

2. As B, the production cost parameter increases, there will be more FPI and less FDI at equilibrium. As the level of B, which represents the cost of production in the host country, increases, equilibrium outcomes changes in a gradually preference for more FPI and less FDI. Since B represents the cost of production, we expect developed countries to have higher levels of B. Thus, the model predicts that developed countries (with higher costs of production, and thus lower profitability of investment projects) will attract more FPI, whereas developing countries will attract more FDI.

3. When FDI investors acquire a firm in a developing country, it transfers TFP in the source country to the new firm, reducing the productivity cost B which strengthens the relative attractivity of developing countries for FDI.

4. As the liquidity need heterogeneity among investor’s increases, a separating equilibrium – with a large difference between the withdrawal rate of FPI and the withdrawal rate of FDI – becomes more likely. When B < B*, an increase in Hλ shifts the equilibrium outcome from Case 1, which is a pooling equilibrium, to Case 3, which is a separating equilibrium with a large difference between the withdrawal rates of the two types of investment. When B > B*, an increase in Hλ shifts the equilibrium outcome from Case 5, which is a pooling equilibrium, to Case 3. It results that a high level of liquidity need heterogeneity among investors causes them to be attracted to different types of investments, and leads to observed differences in withdrawal rates and volatility between FDI and FPI.

5. There is a domain of the fundamentals (B, Hλ , C) with multiple equilibria. Multiple

equilibria exist when B < B* and ( ) ( )BB HHH*** λ<λ<λ . In this region, Cases 1, 2, and 3 are

possible equilibria. The reason for the multiplicity is the existence of externalities among Hλ investors. This multiplicity may generate severe jumps from equilibrium with a lot of direct investments to equilibrium with significantly fewer direct investments. This may explain why some countries have more direct investments than other countries with similar characteristics, and why some periods of time are characterized by more direct investments than others. The existence of multiple equilibria also generates interesting welfare implications.


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of Finance, 50, 1995, pp. 1147-1174 Chari, A., Ouimet, P.P., Tesar, L., “Acquiring Control in Emerging Markets: Evidence from

the Stock Market”, Working Paper, University of Michigen, 2007 Froot, K.A., Stein, J.C., “Exchange Rate and Foreign Direct Investment: An Imperfect Capital

Markets Approach”, Quarterly Journal of Economics, 106(5), 1992, pp. 1191-1217 Gordom, R.H., Lans Bovenberg, A., “Why Is Capital So Immobile Internationally? Possible

Explanations and Implications for Capital Income Taxation”, American Economic Review, 86, 1996, pp. 1057-1075

Hennart, J., Kim, D., Zeng, M., “The Impact of Joint Venture Status on the Longevity of Japanese Stakes in U.S. Manufacturing Affiliates”, Organization Science, 9, 1998, pp. 382-395

Klein, M.W., Rosengren, E.S., “The Real Exchange Rate and Foreign Direct Investment in the United State”, Journal of International Economics, 36, 1994, pp. 373-389

Klein, M.W., Peek, J., Rosengren, E.S., “Troubled Banks, Impaired Foreign Direct Investment: The Role of Relative Access to Credit”, American Economic Review, 92, 2002, pp. 664-682

Lipsey, Robert E., “The Role of Foreign Direct Investment in International Capital Flow”, NBER Working Paper 7094, 2000

Mikkelson, W.H., Partch, M., “Stock Price and Costs of Secondary Distributions”, Journal of Financial Economics, 14, 1985, pp. 165-194

Perez-Gonzalez, F., “The Impact of Acquiring Control on Productivity”, Working Paper, Columbia University, 2005

Razin, A., Sadka, E., “CorporateTaxation and Bilateral FDI with Threshold Barriers”, NBER Working Paper, 1196, 2005


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REMITTANCES STATISTICS IN THE REPUBLIC OF MOLDOVA

Eugeniu AFTENE

Candidate Ph. D. Ion PÂRŢACHI Ph. D. Professor

Academy of Economic Studies, Chişinău Abstract. Economical migration and remittances are two phenomena characteristic

to transition economies, such as Republic of Moldova. Is very important to get to know these phenomena in every little detail, because it affects more and more the social and economical life of the country. The methodology used now by the National Bank of Moldova to estimate the remittances is not perfect, because of the lack of information about remittances that came into our country by unofficial ways, but still it corresponds best to the actual situation in the country.

Needs the methodology to be reviewed or not? It is a difficult question. To give an answer to this question, first we must study very well national market and the experience of the other countries in the field.

Key words: Remittances in the Republic of Moldova; Money transfers through

national bank system; Compensation of employees for working abroad. REL Classification: 10Z, 12Z, 19Z

Republic of Moldova is a country with developing economy, which, is now, at the

transition period from the closed type economy to the market economy. Taking into account the development level of our country, economical migration and remittances, are two normal phenomena. However, any economical phenomena must be known in every little detail, to be able more easily to observe and if it’s necessary to correct the socio-economical policy of the state.

The main source of information on remittances is the National Bank of Moldova. The Balance of Payments division of the NBM is responsible of calculation and dispersion of the information on remittances. This information is published in the Balance of Payments of the Republic of Moldova.

Remittances can be defined as the whole money inflows, that are send by the Moldova’s migrants, natural persons, bank into Moldova. It’s known that these amounts of money came into our country using more ways, some of them are easier and other are harder or even impossible to register. For the correct determination of the remittances volume, NBM must take into account all those ways, but because on some of those methods there is no or almost no information it is hard to do, and NBM must estimate them indirectly. The NBM methodology is adapted to these conditions of our economy, and according to this


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methodology(1) estimation of the inflow of money transfers, by the natural persons which work abroad, is done in three steps:

Estimation based on the transfers made through bank system For this are used data from the 1-BP and 2-BP forms, reported by all commercial banks

from country to the NBM; Additional assessment based on the analysis of banking flows and domestic

consumption (domestic expenditures) in foreign exchange. The remittances assessment is done based on data from NBM directions, and on

information from external sources like information on number of transactions with real estate (1-RFC form) from the State Agency for Land and Cadastre and information on average market prices of real estate (1-PMI form) „Lara” firm – real estate agency

Aggregation of data obtained under the previous stages and their further adjustment. At the moment on financial-banking market in Moldova there are a lot of Express

Money Transfer Systems, that are available from almost any place in the world. Such services can be used in every commercial bank and in the SE “Posta Moldovei”. Activity of these institutions in the money transfers field is controlled by the regulation on foreign exchange regulation on the territory of the Republic of Moldova(2). „The Regulation establishes the general rules of performing foreign exchange operations, as well as the rights and obligations of residents and non-residents in the sphere of foreign exchange operations’ performance”(3).

The most widely used Express Money Transfer Systems on the territory of the Republic of Moldova are:

Anelik BESXpress Blizko Caspian Money

Contact Grecia Transfer Inter Expres Leader Migom Money Gram Poşta Rapidă Privat Money Strada Italia Transfer Trabex Travelex Turkiye Express Unistream Uno Money Transfers Western Union Xpress Money

The amount of money sent through the Money transfer systems is just a part of the

amount of transfers through the commercial banks from Moldova. According to the data published quarterly, by the NBM, on its official web site, in the second quarter of 2007, in country were sent using commercial banks network 265,29 $US million, including 193,91 $US million via Express Money Transfer Systems.

Money transfers (remittances) from abroad by natural persons

via commercial banks of the Republic of Moldova, yearly dynamics Table 1

(US$ million) Quarter I Quarter II Quarter III Quarter IV Annual Total EMTS* Total EMTS* Total EMTS* Total EMTS* Total EMTS*

1999 12,41 5,70 20,23 11,31 26,08 16,08 30,90 19,12 89,62 52,21 2000 29,35 19,49 36,02 23,92 42,37 28,49 45,20 29,88 152,94 101,78 2001 42,64 28,69 45,29 30,98 59,87 38,52 64,19 41,89 211,99 140,08 2002 50,77 32,74 60,21 39,34 73,05 46,20 70,09 43,07 254,12 161,35 2003 61,12 35,12 76,12 42,54 90,94 50,22 89,11 47,71 317,29 175,39 2004 76,92 37,57 93,07 47,70 115,29 63,89 137,13 86,30 422,41 235,46 2005 120,05 81,19 181,78 132,62 197,13 146,74 184,28 137,29 683,24 497,84 2006 149,45 106,31 204,52 146,64 249,22 186,20 251,36 189,46 854,55 628,61 2007 209,53 146,27 265,29 193,91

Note: * Including via Express Money Transfer Systems Source: NBM official web site, http://www.bnm.org/md/docs/statistica/158_4576.pdf


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For the period 1999 – 2007, from 45,9% (quarter I, 1999) to 75,4 % (quarter 4, 2006) from the whole amount of money transfers by natural persons via commercial banks from Moldova, were done using express money transfer systems.

Analyzing the quarterly dynamics of money transfers via commercial banks, we conclude that transfers have a seasonal character, having maximum in the quarter 4, sometimes 3rd and minimum in the first quarter of the year, as the amount of transfers grow this characteristic became more obvious. We can see all this in the chart 1.

The seasonal character of the money transfers can be explain by the fact that at the end of the year, some of the migrants returns bank into country to celebrate the winter holydays with their families and spend more money for presents, or just send more money for presents for their relatives. Consequently, in the first quarter they either work less time, in case they spent winter holidays in Moldova or some part of the money are used for the compensation of the extra expenditures at the end of the year.

0

100

200

300

19992000200120022003200420052006200700.20.40.60.81

transfers via EMTS (left axis )t ransfers via EMTS / t ransfers via NBS (right axis )

Note: EMTS – Express Money Transfer Systems NBS – National Banking System of the Republic of Moldova Source: National Bank of Moldova, Balance of Payments Division.

Figure 1. The quarterly dynamics of the money transfers via national banking system ($US million)

Compared similar periods of the previous year, in the quarter I 2007, the total amount of the

transfers via commercial banks were by 40.2% bigger, and via Money transfer systems – by 37.6% bugger. In the second quarter 2007 the growth rhythm to quarter II 2006, was smaller: 26.6% and 32.2% respectively, compared with quarter I 2007, the growth rhythm was as follow 29.7% for total transfers and 32.6% for transfers via EMTS. Have to be mentioned that today’s level of transfers via bank system 265.29 $US million in quarter II 2007 is greater than the level of the 2002 year – 254.12 $US million, and that of transfers via express transfer systems – 193.91 $US million, is greater than the 2003 level – 175.59 $US million.

To transfer money via bank system and express money transfer systems are not the only options of the migrants. Sometimes, these options even are not available, because of illegal (unofficial) status of the migrant on the territory of the country. In such cases, they mostly apply to services of bus drivers or the train attendants, that circulate between Moldova and the country were thy currently are. Drivers and attendants for a small compensation will offer such services. Another method is to send money with a compatriot that returns back home. Or, in case the migrant stays abroad not for long time, or when the migrants have the possibility to go home and back to work few times a year, they may prefer themselves to bring money to family.


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All these cases are regulated by the Law no 1569-XV from December 20, 2002(4) regarding the way money can be introduced and taken off the territory of the Republic of Moldova by natural persons, The Customs Code of the Republic of Moldova(5) and other laws.

Directly to the way money can be introduced or taken off the territory of the Republic of Moldova refers the 31 article of the Law regarding the way goods are introduced and taken off the territory of the Republic of Moldova by natural persons, introduced by the Law no. 61-XVI of 23.03.2006(6)

According to these, natural persons have the right „to introduce on the territory of the Republic of Moldova banknotes, coins and traveler’s checks in the national currency of the Republic of Moldova, as well as banknotes, coins and traveler’s checks in any other currencies without any limits, without presenting any confirming papers to the customs [...]”(7). At the same time, natural persons „are liable to declare on paper banknotes, coins and traveler’s checks in the national currency of the Republic of Moldova, as well as banknotes, coins and traveler’s checks in any other currencies introduced on the country territory if the amount is greater than 10,000 euro (or its equivalent)”(8).

Unfortunately, there is no concrete information about the amount of money that came into country these ways.

The value of remittances indicated in the Balance of Payments of the Republic of Moldova, complied by the Balance of Payments Division of the National Bank of Moldova, is adjusted using the method described above to take into account the amount of remittances that came into country byways that cannot be determine directly.

In the Balance of Payments we have two positions that refers to remittances. These articles are “Compensation of employees” in the Current account/Income and “Workers' remittances” – Current Account/Current Transfers.

Compensation of employees According to the NBM methodology, the Compensation of employees that work

abroad less than 1 year is considered that as the greatest part of remittances. Analyzing the data of the Balance of Payments of Moldova, we can conclude that the greatest part of Income inflows into country from the current account is the compensation of the employees, Moldovan resident that work abroad. The ratio of this income category in the total income inflows into country differs by economical region (CIS or Rest of the World) and from one period to other. For CIS is characteristic a bigger ratio, that vary between 97% and 100% (exception quarter III 1998, when ratio has reduced to 89.8%).

707580859095

100

199619971998199920002001200220032004200520062007TOTAL CIS Rest o

Source: National Bank of Moldova, Balance of Payments Division

Figure 2. Ratio of the income – compensation of employees inflows of total income inflows, total and by geographical zones, quarterly dynamics (%)


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For the Rest of the World the ratio is smaller. The minimum ratio was registered in the first quarter 1996 – 71.7%, in the periods that followed the ratio continue to increase to the maximum of 97.6% (quarter II 2004). After achieving this maximum, the ratio starts to decrease and in quarter II of the 2007, its value is 83.4%. For the whole income from employee compensation (Rest of the World + CIS) the situation is the same as for the Rest of the World (see the chart 2 for details).

This can be explain by the biggest share of the incomes from the Rest of the World against the CIS. But in the last quarters can be observed a considerable decrease of the share of the incomes from the Rest of the World, and as a consequence grow of the share of the income from CIS. Thus in the first 2 quarters of 2007, the share of income from the Rest of the World has registered minim values, below 50%: 45.4% in Quarter I, 2007 and 35.2% in quarter II, 2007.

-20

30

80

130

180

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007Rest of the World CIS

Source: National Bank of Moldova, Balance of Payments Division.

Figure 3. Distribution of the income – compensation of employee, by economical regions CIS and the Rest of the World, in quarterly dynamics ($US million)

This fall is due both a slow decrease of the real amount of the income – compensation of

employee from the Rest of the World and the increment of those from CIS. Thus, if in the period 1996 – 2004, the amount of income inflows from CIS was net below of those from the Rest of the World, then in 2005 and 2006 these amounts of income inflows are almost at the same level, and in the first 2 quarters of the 2007 inflows from CIS are greater than from the Rest of the World.

Along with the increment of the amount of income inflows to the country, the seasonal character of them became more pronounced. Usually, the first quarter of the year is characterized by a recession more or less acute, and in the next 3 quarters the income amounts that come into country increases.


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0

20

40

60

80

100

120

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007Rest of the World CIS


Figure 4. Inflows of income – compensation of employee by economical regions Rest of the World and CIS, quarterly dynamics ($US million)

Workers' remittances Workers’ remittances inflows have too a seasonal character, at the year begin

registered a recession compared with the end of the previous year, after that the amount of income inflows start to increase again, and at the end of the year it gets to the year’s maximum. The seasonal character of the workers’ remittances became more pronounced in the last years when their amount is considerably greater.

0

50

100

150

200

1999 2000 2001 2002 2003 2004 2005 2006 2007TOTAL CIS


Figure 5. Workers' remittances inflows by geographical zones, in quarterly dynamics ($US million)

The greatest part of transfers has their origin in the Rest of the World, but the share of these transfers is reducing in favor of those from CIS. So, if in the first 2 quarters of 1999, workers' remittances were 100% from Rest of the World, then in the nest year this share was reducing, little by little, with small exceptions (quarter III, 1999 – the smallest share of 69.2%), and in 2006, quarter IV it register a minimum value of 76.2%, in 2007, quarter I, the share increases to 85.3%, after what in the quarter II 2007, it’s reducing again to 79.1%.

The total amount of remittances, for the last years was considerable increased from 26.27 $US million in quarter I 1999 to 370.71 $US million in 2006, quarter III (which represents the maximum value ever registered until now). In 2007 year, the remittances amounts still have a high level, 280.08 $US million in the first quarter 2007, and 352.27


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$US million in the second quarter. Compared to the previous year, in the first semester of 2007 the amount of transfers inflows in favor of the natural persons of the Republic of Moldova is by 34.6% greater, accounting for 632.65 $US million. The biggest part of these transfers still came from the Rest of the World (68.3% in quarter I and 58.5% in the second).

050

100150200250300350400

1999 2000 2001 2002 2003 2004 2005 2006 2007TOTAL CIS Rest of the World


Figure 6. Money remittances, by geographical zones, in quarterly dynamics ($US million) Conclusion So, was seen that the greatest part of the money send by natural persons from abroad to

Moldovans’ residents came from the economy residents, persons who work abroad for a period of time less than 1 year. This is also due to the fact that some of the people that get to work abroad are seasonal workers, such as students, or workers in construction field, etc. Although number of persons that emigrates to CIS is greater than to Rest of the World, the amount of remittances from CIS is less than that from the Rest of the World. This difference is especially pronounced for the Workers’ remittances – transfers made by the people who stay abroad more than 1 year. This demonstrate that people who go to work in CIS prefer to stay there less time, this being possible also because the migration costs are relatively smaller compared to those for the Rest of the World, where the migration costs are greater and the revenue are also bigger, and the persons prefer to stay there a longer time (sometimes the accommodation period is longer too).

Notes (1) Source: National Bank of Moldova, Balance of Payments Division (2) Approved by Decision of the Council of Administration of the National Bank of Moldova,

Minutes no. 2 as of 01.13.1994 (3) Alin.2, of preamble of the Regulation on Foreign Exchange Regulation on the Territory

of the Republic of Moldova (4) Published in the “Monitorul Oficial al Republicii Moldova” no. 185-189/1416 of

31.12.2002 (5) Law of the Republic of Moldova no. 1149-XIV of 20.07.2000 // “Monitorul Oficial al

Republicii Moldova”, special edition of 01.01.2007, pg. 103 and the “Monitorul Oficial al Republicii Moldova” no. 160-162/1201 of 23.12.2000


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(6) Law of the Republic of Moldova for modification and completion of the Law no1569-XV of December 20, 2002 concerning the way good are introduces and taken off the territory of the Republic of Moldova by natural persons, no. 61-XVI of 23.03.2006 // Monitorul Oficial al Republicii Moldova nr 102-105/480 of 07.07.2006

(7) Art. 31, alin.(1), let. a) of the Law of the Republic of Moldova no.1569-XV of December 20, 2002

(8) Art. 31, alin.(2), let. a) of the Law of the Republic of Moldova no.1569-XV of December 20, 2002

Bibliography Anghelache, C-tin (1998). Statistică. Teorie şi aplicaţii, Editura Economică, Bucureşti Brown, L. (2002). Starea lumii-2002, Editura Tehnică, Bucureşti International Migration 2002 – United Nations Population Division. Department of

Economic and Social Affairs Branaşco, Natalia (2002). Consecinţele social-economice ale migrării forţei de muncă, în

Simpozionul internaţional al tinerilor cercetători, Ediţia a V-a (19-20 aprilie 2007), Chiţinău, p.141-142.

Dumitru, D. (1998). Forţa de muncă în lume, Editura Conphys, Bucureşti Uvalic, M. (2006). Trade in Southeastern Europe: Recent trends and some policy implications,

The European journal of comparative economics, vol.3, 2000 National Bank of Moldova, www.bnm.md National Biro of Statistics, www.statistica.md Balance of Payments of the Republic of Moldova, 1997-2006


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USING THE DATA WAREHOUSES IN THE ADOPTION

OF DECISIONS RELATED TO SALES POLICIES

Mihai PĂUNICĂ

Ph.D. Professor Eugeniu ŢURLEA

Ph.D. Professor Florinel SGÂRDEA

Ph.D. Senior Lecturer Aurelia ŞTEFĂNESCU

Ph.D. Senior Lecturer Marian Liviu MATAC

Candidate Ph.D. Assistant Academy of Economic Studies, Bucharest

Alexandru MANOLE Candidate Ph. D. Lecturer

University ARTIFEX, Bucharest

Abstract. One of the most stringent problems related to the managerial activity is the forecast of the level of demand (in order to ground the structure of the production that is to be manufactured in the following period) and of the prices (the managers need to be aware of the maximum level of the price at they need to report with the costs and the profit margin). One of the information sources for the managers is the economical and financial analysis of the turnover. The application of the methodology of the economical and financial analysis is highly supported by the applications of the information technology. The evolution of the modern decision support software systems based on data warehouses allows the integration of the methods and models of economical and financial analysis for the processing of the raw data.

Key words: data warehouse; dimension; analysis. REL Classification: 14G

1. Introduction One of the most stringent problems related to the managerial activity is the forecast of

the level of demand (in order to ground the structure of the production that is to be manufactured in the following period) and of the prices (the managers need to be aware of the maximum level of the price at they need to report with the costs and the profit margin).


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The informational level of the managers concerning the problems they are to act on has a decisive impact on the quality and the performances of the adopted decisions. From one case to another, there is either a deficit of information, or the information is sufficient, but acquiring of it is very difficult (heterogeneous sources, low level of structure).

Therefore, it is mandatory for the managers, when collecting information, to take into consideration all the available sources, from within the information system of the firm or from outside of it. The same importance goes for the processes offering support for the processing of information, their main purpose being the efficiency of the information flow.

The economic and financial analysis represents one of the most important sources of information about the activity of an enterprise, and this information is mostly used in the decision-making process. One decision is more likely to be correct as the managers responsible for taking that decision are better informed about the respective situation. And the economic analysis is the main source of information on these lines.

The data warehouse completes the informatics systems of the organizations, along with the transaction-based software systems. The role of the data warehouse is to store data taken from the other information systems, with the aim to have analyzed them by various means. The data warehouses are the “backbone” of the decision support systems based on the synthesis and analysis of data, or, in other words, the data warehouse contains the “raw material” for the decision support systems based on the synthesis and analysis of data.

The economic and financial analysis offers the possibility for the diagnosis of any aspect of the activity of the firm, through a system of specific indicators. The methodology of analysis imposes in the first place the calculation of these indicators and their interpretation of their values (we may talk at this step about a static analysis). Most indicators, however, can be analyzed also in terms of their evolution during time, evolution that can be described based on the influences manifested by other indicators. There is, on these lines, a large number of analysis models who relate the influence of an indicator of effects with the evolution of another one ore more indicators – factors of influences, causes in the last instance.

Based on these considerations, we can assert that the analysis models try to decompose of an effect in more causes; causes which can themselves become effects inside other analysis models. This principle is found also in the dimensional modeling process, inside the structure of the parent-child relationships existing between the dimensions of a data warehouse.

The main analysis models (the balance method and the factorial method) have at the basis of the models they use the principle of decomposing the whole in components, the same principle which supports the data aggregation inside a data warehouse.

These similarities allow the creation of a favorable image about the role the data warehouses can play in the support of the activity of economic and financial analysis: the data warehouses can save for the respective personnel the time needed for calculations (sometimes laborious), allowing them to concentrate on the most important part of the analysis: the interpretation of the results.

On the other hand, one of the problems associated with the data warehouses is the capacity of furnish information based on data (Inmon, 2005). The models and methods of the financial analysis are a set of instruments allowing on one hand the definition of the structure of the dimensional model for a data warehouse (in terms of the requirements of the models that are to be used), and on the other hand the exploitation of the data stored in the data warehouse (the use of software instruments for data warehouses according to the requirements of the respective analysis methodology). This last element represents an answer tot the problem raised by William Inmon.

2. Turnover analysis models which supply useful data for the decision making

process regarding the sales policies One model for the analysis of the turnover is based by the chain substitution method

and aims at the identification of the relationships between the turnover and the quantities (qi), and the sales price (pi). The model is based on the following formula:


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∑=

×=n

iii pqCA

1

where: qi – the sold quantity from the i product/service; pi – the average sales price, without VAT, of the i product/service. The model can be exploited through the following steps: - the determination of the variation of the turnover:

001101 pQpQCACACA ×−×=−=Δ - the determination of the influence of the sold quantity:

0001 pQpQCA q ×−×=Δ

- the determination of the influence of the average sales price:

0111 pQpQCA pm ×−×=Δ

- the determination of the influence of the structure of sold production:

011 pQpQCA recqs ×−×=Δ

where 100

101∑

=

×=

n

iii

rec

pgp

- the determination of the influence of the product sales price:

recp pQpQCA ×−×=Δ 111

Following the use of this model, the influences that the modification of sold quantities and the modification of the sales price have over the evolution of the turnover are distinguished.

Due to the correlation between the value of the turnover, the quantities of products

sold and the sales prices, ∑=

×=n

iii pqCA

1

, it can be asserted that both the quantity factor q

and the price factor p are direct proportional with the turnover. Therefore, the mathematical positive values of the influences of the two factors can be

appreciated as favorable influences on the modification of the turnover, while the negative values will be treated as unfavorable influence.

Also, another interpretation can be made by comparing the values of the influences of the two factors. If the value of the influence of the q factor is greater, this reflects a favorable situation for the position of the firm related to the marketplace on which acts, because it indicates an increase of the demand for the products of the firm. By also analyzing the evolution of the demand at the level of the sold quantities (according to the methodology of analysis for the dynamics and the structure of the turnover), additional useful information about the demands of the marketplace can be obtained.

But if the greatest weight in the evolution of the turnover is the influence of the price factor, as the difference between the value of this influence and the value of the influence of the other factor ( qp CACA Δ−Δ ) is greater, it is necessary to pay greater attention to the marketing

policies, in order to ensure the future increase for the demand of the products too (and thus the increase of sales). This consideration must be taken into account also because the increase of the prices is not a phenomenon that generates stability for the evolution of the commercial activity of


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the firm, being not a long-term phenomenon. According to the correlations between demand, offer and price, a price situated at a level too high will lead at a certain moment towards the decrease of the demand. In such a situation, in order to maintain the turnover at the same level or at least to prevent the significant decrease of this indicator, the firm could use the solution of increasing the price, but that solution offers a high risk and small chances for success – it is possible that the demand will manifest a further decrease.

The factor named the structure of the sold production indicates the modifications in the structure of the production, if its value is positive, it can be asserted that the demand for the products that are more expensive has increased, simultaneously with the decrease of the demand for less expensive products. The negative value of this factor’s influence indicates the reverse situation: the weight of the less expensive products has increased, while the weight for the sales of more expensive products has decreased.

Example: For a firm selling car security systems, the following data are known:

No. Indicator 2005 2006 Evolution value 1. Turnover 11,639,468.00 16,671,341.00 5,031,873.00 2. Average price 401 350 3. Recalculated average price - 324

• evolution of the turnover:

=−=Δ 01 CACACA 5,031,873.00 lei • influence of the sold quantity:

qCAΔ = 5,727,491.38 lei

• influence of the average sales price: =Δ pmCA -695,618.38 lei

Of which: i. the influence of the evolution of the structure of the sold production:

=Δ qsCA -1,725,922.99 lei

ii. the influence of the modification of the prices per product: =Δ pCA 1,030,304.61 lei

Based on the interpretation principle previously stated, the results can be interpreted in the following manner:

- the most significant influence was manifested by the factor “quantity of products sold”, which has determined the increase of the turnover by 5,727,491.38 lei, a value 1.14 times greater than the overall evolution of the turnover;

- the modification of the structure of the sold production has determined the decrease with 1,725,922.99 lei of the turnover. This value indicates the fact that the weight of the less expensive products has increased, simultaneously with the reduction of the weight for the products with bigger prices. The value of the influence is significant when compared with the overall evolution of the turnover (34%);

- the modification of the prices has partially covered (close to 60%) the influence of the previously presented factor, and has determined the increase with 1,030,304.61 lei of the turnover (value that accounts for 20% to the total evolution of the turnover).

Another model analyzes the dynamics and the structure of the turnover, is based on the balance method and assumes the decomposition of the incomes related to the turnover


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according to their source (stores, products, customers etc.) and the analysis of their dynamics, according to a methodology whose steps are presented below:

a) the identification of the income sources which are contributing to the formation of the turnover;

b) the classification of these income sources (in terms of several criteria, such as the area where the incomes have occurred, the products and product categories that have generated income, the organizational structures of the firm – stores or sales teams/agents etc.);

c) the determination of the sense and the value of the evolution for each category of income (their influence of the turnover);

d) interpretation of the results. The sum of the influences determined represents the evolution of the turnover. The general formula of the analysis models used is presented below:

CA =∑=

n

iiV

1

: the formula reflects the formation of the total turnover (Vi: individual

income corresponding to a single criteria).

∑=

Δ=Δn

iiVCA

1

: the evolution of the turnover is obtain by summarizing the

evolutions of the individual Vi incomes. Once the values CA, Vi, ∆CA, ∆Vi are determined, the obtained results can be

interpreted having in view the following general coordinates: - the values of ∆CA, ∆Vi are interpreted according to their mathematic sign, the

positive values are considered benefic economic influences (the increase of revenues); - the value of the influence of each income (∆Vi) can be compared with the evolution

of the turnover, resulting an image of the degree of reliability of the activity that has generated the respective income;

- if the sources of revenues can be ordered in a way that reflects the relative importance of each source in the whole firm (a sorting criteria can be the resources consumed by the respective sources, i.e. an A product might be considered more important than a B product if the publicity for A is more complex/expensive than the one for B, or a X store might be considered more important than Y if the position of X is better than the position of Y) it can be verified if there is a correlation between the level of significance of the source and its influence over the turnover;

- the sorting of the values of the influences allows the extraction of some conclusions like “what products/services/stores had the best evolutions”, “what products/services/stores had the worst evolutions”.

The interpretation of the values generated by the analysis of the structure and dynamics of the turnover offers a large volume of information (this is directly related to the number of criteria which allows the classification of income sources and to the number of income sources), which forms a solid basis for taking decisions related at least to the commercial policies of the firm.

3. The model of a data warehouse for the analysis of the turnover We propose the analysis of the turnover’s dynamics and structure for a firm in terms

of its stores, and its factorial analysis. For this purpose, we have built a multidimensional database with the structure presented in the figure 1. The system uses SQL Server 2005 Analysis Services as support, the information is retrieved using the MDX language. The information is further presented using SQL Server Reporting Services.


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Figure 1. The model of the multidimensional database SALES_ANALYSIS The hierarchy of the MAGAZINE (stores) dimension permits the analysis of the

turnover on towns and then detailed on the stores. a. Analysis on localities The following MDX query extracts the data related to the evolution of the turnover by

locality:

The data are presented in the report in figure 2:

Figure 2. Structure and evolution of the turnover by the geographical dimension Knowing that in 2005 the turnover was 623,025.51 lei greater than the value from

2004, the growth was due to the fact that the value of sales from Pitesti increased (with 1,204,303.16 lei – almost 2 times greater than the evolution of the turnover), while the value of sales in Bucuresti decreased with 581,277.65 lei.

In 2006, the increase with 25,545,516.62 lei of the turnover is 76.82% due to the growth (almost two times, with 19,623,799.27 lei) of the sales realized in Bucuresti, respectively 23.18% due to the growth with 5,921,717.35 lei (4,6 times) of the sales from Pitesti.

The structural evolutions of the turnover by town can be represented using a system of structural charts.


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b. Analysis in terms of stores The following query allows the extraction from the data warehouse of the information

describing the structure and evolution by towns and stores:

The data resulted from the previous query are presented in the report below:

Figure 3. The structure and evolution of the turnover by towns and stores

(the geographical dimension) In 2005 compared with 2004, the sales for Bucuresti have decreased with 581,277.65

lei. The most important factor that has influenced this value was the decrease with 7,066,639.61 lei of the sales for the store „Obor” (with 59%), and the value of the influence is more than 12 times greater compared with the evolution of the sales for the entire town..

Also, a unfavorable evolution was recorded for the „Stefan cel Mare” store, where the sales were, in 2005, with 319,279.52 lei smaller (11%) compared with the figures for 2004. This evolution accounts for 54.9% of the turnover’s evolution for Bucuresti.

For the other stores in Bucuresti, the value of sales has increased: - the sales of the Brancoveanu store have increased with 182% versus the value from

2004 (with 3,577,327.26 lei), the sales dynamics for the store is approximately 6.15 times greater than the dynamics of the entire city;

- for the Tineretului store, the value of the turnover was 2005 with 64% (1,317,274.71 lei) greater than the value for 2004. The value of the store’s evolution is more than 2 times greater than the evolution for the town;

- in the Militari store the sales have increased with 132% (1,061,136.78 lei) from 2004. The value of the dynamics is almost two times greater than the evolution of the sales for Bucuresti;


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- the smallest growth was observed for the Grozavesti store (848,902.73 lei, 4.11 times greater from 2004);

In Pitesti, the opening of a new store in 2005 in the Bascov area has influenced beneficially the growth of the sales for the town (with 1.06%, 12,794.88 lei). The sales for the Prundu store have increased almost four times (more exactly 3.8 times), influencing the growth of the sales for the city with 1,191,508.28 lei.

In 2006, the sales in Bucuresti increased with 19,623,799.27 lei. The most important influence was represented by the increase of sales for the Brancoveanu store, with 11,737,130.59 lei, value which accounts for 59,8% of the total dynamics of the town.

The sales for the Militari store have followed the evolution from the previous year. The value of sales has increased with 7,065,691.25 lei (4.8 times greater), which represents 36% from the total value of sales for Bucuresti.

Another positive evolution was observed for the Obor store, where the value of sales has increased with 2,522,489.33 lei (almost 50 percents). Compared to the value of sales for the entire town, the dynamics of the store accounts for 12.85%. The Grozavesti store had a growth of 64% for the value of sales, representing 3.65% from the total evolution for Bucuresti.

For the Tineretului store, it has been observed a slight decrease, with 1.28% (43,073.28 lei), a value which is not significant versus the evolution for the town.

In the case of the Stefan cel Mare store, the situation has worsened (because the sales have decreased at 16% versus the value from 2005). Also, the fact that the value of the evolution for the sales (2,375,504.16 lei) represents more than 10% from the evolution of the sales in Bucuresti is a matter of concern for the decision makers.

For the stores from Pitesti, the situation has been reversed since 2005. So, for the Bascov store an increase was recorded, of 4.935.209,43 lei (the value of the sales from 2006 are 385 times greater than those from 2005 – not to be forgotten that the magazine was opened during 2005). The store named Prundu has contributed with 999,302.80 lei to the increase of the sales amount for the city, corresponding to an increase of 61.98% for the value of sales.

c. Factorial analysis of the turnover, based on quantities and prices For the application of that methodology, the data are retrieved from the

SALES_ANALYSIS data warehouse. The most effective instrument for the application of the model for the turnover

analysis based on the quantities and prices is the EXCEL spreadsheet application. The necessary data can be extracted from the cube, through the use of the following

MDX query:

The query retrieves from the cube, for each product, the total quantities sold, the average sales prices, the total value of sales, for each product, for each year. Following the query, we have constructed the report presented in the figure 4.

The report can be exported into EXCEL, its structure remaining the same (each cell of the report becomes a cell of the EXCEL worksheet).

Subsequently, using the EXCEL formula and functions, we have made the necessary calculations for the application of the analysis model.


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Figure 4 Quantities and average sales price during 2004-2006 For the 2005 analysis, the result of the processing is presented in the following table:

Analysis 2005 versus 2004 Turnover 20,771,341.76 21,394,367.27 Recalculated Turnover 0 118,118,596.15 Turnover with corrected price 0 5,135,537.94 The influence of the quantity 0 97,347,254.39 The influence of the structure 0 -112,983,058.21 The influence of the price of products 0 16,258,829.33 Total 0 623,051.51

In 2005, the increase of sold quantities led to the growth of the turnover with

97,347,254.39 lei. This value is more 4 times greater than the value recorded in 2004, and also than the total value of turnover in 2005 and reflects a benefic influence. Also, the increase of the average sales price per product has generated an increase of the turnover with 16,258,829.33 lei, value 26 times greater than the overall evolution of the indicator.

The only factor that has influenced in an unfavorable manner was the structure of the sold production (the behavior of this factor was analyzed in a previous section), which provoked the decrease with 112,983,058.21 lei of the turnover.


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For 2006, the data are presented in the next table:

Analysis 2006 versus 2005 Turnover 21,394,367.27 46,939,884.00 Recalculated Turnover 0 53,517,398.09 Turnover with corrected price 0 43,232,318.76 The influence of the quantity 0 32,123,030.82 The influence of the structure 0 10,285,079.33 The influence of the price of products 0 3,707,565.24 Total 0 25,245,516.73

In 2006, compared with 2005, the total quantity of sold products has increased, which led to the growth with 32,123,020.93 lei of the turnover. This value (greater than the modification of the turnover) indicates a highly favorable situation for the activity of the firm – the increase of the demand for the products of the firm.

The structure of the sold production has modified, generating a decrease with 6,577,498.93 lei of the turnover. This means that the weight of the more expensive products has diminished, and the weight of the products with smaller prices has increased. By analyzing the sales per product, (quantities and prices), it can be determined what products have led to this unfavorable situation and measures can be taken to correct this situation. The evolution of the individual prices has generated an increase of the turnover with 3,707,572.62 lei (14.51% from the total dynamics of the turnover).

Conclusions We consider that the performances of the data warehouses combined with the informational

power of the economical and financial analysis models and the newest techniques offered by the Business Intelligence instruments are offering a real support in the run of the decision-making processes. The software presented in the paper represents a proposal from the authors for putting to good use the techniques of the economical and financial analysis in order to exploit with maximum efficiency, from an informational angle of view, the data available in the OLAP systems of the analyzed firm. The construction of the system is based on the research of the authors and the experience accumulated in the use of the Microsoft’s analysis and Business Intelligence tools and, by the experience acquired in the field of the economical and financial analysis, as well as the study of the documentation in the bibliographic references. For the reports, we have attached the related MDX query, in order to illustrate the mode of acquiring from the data warehouse of the values for the applicable indicators of a model. Each report is joined with the interpretation of the results it presents, reflecting the described analysis principles.

Note

1 William H. Inmon, “Building the Data Warehouse”, Fourth Edition, Wiley & sons, 2005

Bibliography

Anghelache, C.S., Manole, A., „Implementarea sistemului software ERP la nivelul unei

firme”, Economistul nr. 2056 (3082), 06.02.2006 Inmon, W.H. (2005). Building the Data Warehouse, Fourth Edition, Wiley & Sons Manole, A. (2006). „Modelul unui sistem informatic cu depozit de date pentru analiza cifrei

de afaceri”, Revista Economie Teoretică şi Aplicată, nr. 493/03.06.2006 Misner, S.T. (2005). Microsoft SQL Server 2005 Reporting Services Step by Step, Microsoft

Press, Redmond Popa, Gh., Manole A., „Procesarea datelor multidimensionale prin utilizarea limbajului

MDX”, Analele Universităţii Titu Maiorescu, Seria „Ştiinţe Economice”, 2005 Popa, Gh., Udrică, M., Manole, A., Vasilciuc, B., Gârba, M. (2006). „Microsoft SQL

Server”, Editura Economică, Bucureşti Robu V., şi colectiv, „Analiza economico-financiară”, www.ase.ro


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THEORY AND METHOD IN THE IMPROVEMENT OF THE FINANCING

FOR THE ACADEMIC LEARNING INSTITUTIONS

Mihai PĂUNICĂ

Ph.D. Professor Eugeniu ŢURLEA

Ph.D. Professor Florinel SGÂRDEA

Ph.D. Senior Lecturer Aurelia ŞTEFĂNESCU

Ph.D. Senior Lecturer Marian Liviu MATAC

Candidate Ph.D. Assistant Academy of Economic Studies, Bucharest

Alexandru MANOLE Candidate Ph. D. Lecturer

University ARTIFEX, Bucharest Abstract. The academic education is organized in public and private universities which are

non-profit, apolitical organizations and are promoting the education and the research as public benefits. The mission of the university is the creation, delivery and put in value of the knowledge. To this effect, it is promoting the learning, teaching, research and creation in the scientific, technological, arts and sports areas, contributing to the development of human culture and knowledge, in order to ensure the personal development of the beneficiary, the welfare of the society and of the communities. In the educational area, the university offers competitive qualifications on the labor market. We propose that the whole academic learning system to be sustained by taxes, the state to allocate to the universities funds in terms of their social security policy followed by the executive and the demands of the labor market, established by the ministry. Following this, the funds would be allocated based on the proposed program, keeping the actual equivalent criteria for students – domain-based – as elaborated by the CNFIS.

Key words: financing; university; contract.

REL Classification: 4C, 4D

1. Introduction Between the “state” and “education” structures there is an interdependency-type

relationship. The problem of the quality of the educational process in the learning system might be better understood by taking into consideration the entire contradictory evolution of the society.


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The economical and social life of a nation is a subsystem of the whole life of the planet, and each nation’s educational system is a subsystem of the economical and social life, with major impact on its functioning. In order to understand the evolution and the future of the economical and social life of a nation, the world trends must be understood, and the national educational system must impose the necessary feedback, adaptable to the educative perception of each nation.

When asserting the level of the public expenses related to education and reporting them to the Gross Internal Product, each year the following sources of financing were considered: the national budget, the local budgets, foreign credits, the unemployment insurance budget, external non-repayable funds and the own income of the educational entities. In 2007, the percentage of educational expenses supported only by the national budget is 2.2% of the GIP.

The academic education is organized in public and private universities, are non-profit, apolitical organizations and are promoting the education and the research as public benefits.

The mission of the university is the creation, delivery and put in value of the knowledge. To this effect, it is promoting the learning, teaching, research and creation in the scientific, technological, arts and sports areas, contributing to the development of human culture and knowledge, in order to ensure the personal development of the beneficiary, the welfare of the society and of the communities. In the educational area, the university offers competitive qualifications on the labor market.

Starting January the 1st, 1999, the financing of the public academic educational entities is being performed according to the provisions of the Article 171 of the Law of Education no. 84/1995, republished, with subsequent updates and completions and is based on a contract between the Ministry of Education, Research and Youth and the respective academic educational entity, as follows:

- institutional contract for the basic financing, for the scholarships and social protection of the students, as well for financing the investments;

- complementary contract for financing the academic scientific research, the capital repairs, endowment and other investment expenses, as well as subsidies for housing and food. The amounts regarding the academic scientific research included in the complementary contract are being spaced out, being exceptions from regulations, to rates established through execution schedule graphics, attached to the respective research contracts.

The criteria after which it is being established the financing of the academic learning institutions from the national budget, regarding the basic financing and transport facilities are approved by the Ministry of Education, Research and Youth, taking into account the proposals submitted by the National Council for Financing the Scientific Research in the Academic Education (CNFIS), and by the National Council of the Scientific Research in the Academic Education (CNCSIS).

The basic financing is performed by the Ministry of Education, Research and Youth in order to ensure the proper run of the educational process at academic and post-academic levels, according to national standard.

The funds for scholarships and social protection are to be found in the institutional contract and they are allocated in terms of students and Ph.D. students at day-school, who are not paying taxes for studies.

The financial resources allocated, through managerial strategy, to the public academic learning institutions, are completed with extra-budgetary resources.

In the private education, the financial resources are only extra-budgetary, so, in this situation, the financial and accounting management is more flexible and more efficient.

The management and the use of extra-budgetary resources is performed by each institution, based on the incomes and expenses budget, elaborated with an equilibrium focus, according to the criteria established by the Ministry of Education, Research and Youth and its approval.

The incomes and expenses budget includes all the financial resources needed to achieve the objectives form the strategic plan of each academic learning institution during that financial year.


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The extra-budgetary resources of the academic learning institutions are made of the following:

- incomes form taxes and activities performed by the learning entities. This includes: taxes legally collected from Romanian and foreign persons, revenues from selling course materials and non-periodical publications, revenues from services, incomes related to sportive and artistic events, revenues form rents, external partnerships, other than those financed by the Ministry of Education, Research and Youth, as well as other revenues;

- other incomes: donations, revenues from sponsors, other non-repayable sums; - incomes from the scientific research activities, design, expertise, counselling, which

are functioning on extra-budgetary principles. Such incomes may result form research contracts with other corporate bodies (economic agents, National Authority for Scientific Research – ANCS and other interested corporate bodies). As well, in the research-related activities are also included the amounts referring the research grants obtained from the Ministry of Education, Research and Youth, through competition;

- revenues from micro-production, the activity of educational experimental stations, botanic gardens, specialization and development centers, editorial activities, all of which are working on extra-budgetary principles;

- revenues of the students’ hostels and canteen, which includes: encashment from the hostel and canteen tax, the value of food, income from attached ménages, from renting spaces and other proper revenues for hostels and canteens.

In the incomes and expenses budgets of the academic learning institutions, the following types of expenses are included:

- sums regarding the basic financing, destined to cover the average learning and education cost, related to: personnel expenses (salaries, contributions to the social security, unemployment and health insurance funds, internal and external travelling expenses) and the material and service-related expenses, with the exception of the capital repairs and expenses regarding the transportation facilities granted to the students, according to the law;

- expenses regarding the complementary financing, supported by the national budget, destined to endowment and investments, capital repairs and some expenses related to the academic scientific research, as well as to cover a part of the maintenance expenses for hostels and canteens;

- expenses regarding the scholarships and the social security of the students, covered from sources granted by the national budget;

- expenses regarding some investments, financed by the national budget; - expenses from external sources, i.e. credits and aids for completion of some projects, as

well as fund allocated from the national budget for completion of some co-financed projects, representing the contribution of the Romanian Government to the completion of those projects;

- expenses from proper income sources, conducted according to the Law of Education no. 84/1995, republished, with subsequent updates and completions.

The definitive allocations from the national budget, allotted to the academic learning institutions, are established each year, inside the limit approved by the Ministry of Education, Research and Youth, through the yearly law of the budget. Based on these, the annual budgets of incomes and expenses of the academic learning institutions are established.

For the extra-budgetary activities, there are drawn up distinct budgets of incomes and expenses, attached to the incomes and expenses budget of the institution and approved by the academic senate.

Simultaneously with the budget of incomes and expenses, it is approved, as annex, the list including the capital expenses, distributed by financing sources: proper incomes, special-destination allocations, external sources, on which basis the financing is realized.

2. Theory and method in the elaboration of the budget of an academic learning institution

For the present study, it has been considered as working basis some methodological aspects of the CNFIS budget elaboration in an university.


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2.1. Grounding the necessary of funds for the basic allocation Upon proposal of the CNFIS, the total quantum of the basic financing and the

modality of apportionment of each university of the allocated funds for the basic financing are elaborated using a formula, built by the CNFIS, in which the essential parameters are the unit allocation per equivalent student and the quality indicators.

1. Apportionment to universities of the basic financing starts from the number of physical students, by domains and forms of education which, balanced with the equivalent quotients on educational forms, results in the number of equivalent students per domain.

Mathematically, this is expressed through the following formula:

∑=

×=F

f

Ufdf

ud SeSE

1

*)

Where: - U

dSE - number of equivalent students from the d domain of the U university; - U

fdS - number of physical students from the d domain, of the f educational form, of the U university at the reference date;

- ef - the equivalent quotient of the f educational form; - F – the total number of educational forms financed from the national budget in the

Romanian universities (for the current year F = 19). 2. The notion of unit equivalent student represents the capital parameter of the

financing methodology, its value being financially considered a measure of the dimension of the universities, its introduction, relatively new, expresses in mathematical terms the fact that the education of a students necessitates different costs depending of the domain and the form of education.

BVd

D

dd

BV SECSEU ×= ∑=1

*)

where SEUBV= the number of equivalent students of the „Transilvania” University of Braşov;

BVdSE = equivalent students in the d domain of the „Transilvania” University of Braşov;

- Cd = the cost quotient of the d educational domain; - D = the total number of educational domains financed from the national budget in

the Romanian universities (for the current year D = 15). The quality indicators are calculated in two steps, in the first being determined the

absolute values of the indicators and, in the second, the relative values of the quality indicators. The (absolute) indicators of quality are calculated, they are distinct, individual and they differ in complexity. The formulas used to transform the absolute indicators of quality in relative indicators are identical, with two notable exceptions being the complex indicators IC6 – Level of performances in scientific research and IC13-The total quality of the academic and administrative management, which are calculated using different formulas (indicators calculated in the table according to the CNFIS methodology).

It is defined as starting point the total allocation destined to apportion the basic financing through algorithm, which represents the budgetary allotment approved for basic financing by the Law of the Budget, after the retain of 10% according to Article 21(4) from the Law no. 500/2002 regarding the public finances, with subsequent completions and updates.

Then, when applying the apportionment algorithm, the number of unit equivalent students is taken into consideration, for each individual university, calculated based on the number of equivalent students and educational domain cost quotients, and the values of the relative quality indicators for each university, calculated based on the values obtained for the absolute quality indicators. The result is the allocation for each university.

From the total of the basic financing, 80% are apportioned exclusive according to the number of unit equivalent students, and for the remaining 20% the quality indicators are taken into account.


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2.2. Grounding the necessary funds related to the subvention granted to students who are living in students hostels

The coordinates considered in the budget grounding for the subvention granted to the students are:

- the number of physical students, from which are separately emphasized the students whose parents are teachers, the orphans or the foreign students having a scholarship form the Romanian state. The role of this emphasis is the double subvention differently granted to the above mentioned categories of students;

- the quantum of the monthly subvention – established by a note approved by the ministry of education, research and youth, after the completion of the negotiations with students’ national organizations.

Grounding the necessary funds for the subvention granted to the students living in

students hostels Table 1

Institution Romanian Students

(Sr)

Students sons of teachers and students whose parents

are deceased (S1)

Foreign students, scholars of the

Romanian state (S2) Subvention

units

UNIVERSITY 3,542 392 172 4,670

Month 1 2 3 4 5 6 7 8 9 10 11 12 Subvention/Month 2007 (RON) (C) 125 125 107 90 75 52 36 39 39 90 125 125

Subvention units (St) = Sr + S1x2 + S2x2 = 3542+392x2+172x2 = 4.670

Calculation of the annual allocation for hostels and canteen subventions = ti

i SC ×∑=

12

1

St = 4,800,760 RON As well, in terms of the level of degradation of the hostels and inside the limits of

allocated funds within this type of allocation, there can be included the capital repairs. 2.3. Grounding the necessary funds for students scholarships In the academic environment, there are two categories of students who can benefit of

scholarships: - Romanian students; this category includes: • scholarships granted to worthy Romanian students; • scholarships granted to students of post-academic education; • rural environment scholarships, granted to some students living in rural areas; to students

of day-school from the public and accredited private educational entities, and who, according to the methodological normative of the HG no. 769/2005, are fulfilling simultaneously the following conditions: they live in rural areas, they have no backlog exams during the grant of the scholarship, they are not repeating any year of study and they commit themselves, by a standard contract, completed according to the model from the methodological normative, to profess as teachers, upon the completion of the academic studies, in the rural educational entities, according to their specialty, for a period no less than the period on which the scholarship was granted.


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• “Olympic” scholarships for the students who have achieved distinctions at the international olympic contests in the precedent academic year and who benefits the “Olympic Merit” performance scholarship.

- Foreign students, scholars of the Romanian state, category which includes: • Foreign students of the Romanian state; • Foreign students of the academic education; • Foreign PH.D. (extramural) students; • Scholarships granted for the practical activities of the students from the Republic of

Moldova; • Specialization scholarships for foreign students; • CEEPUS scholarships, granted by partner universities, within the CEEPUS (Central

European Exchange Program for University Studies) program. 2.4. Grounding the necessary funds related to the individual subvention for the

housing of the students living in other spaces than the hostels of the academic learning institutions

In this category there are included the students from the budget-financed studies who have requested and have not received housing in hostels and who are going to live in other spaces than the hostels of their academic school. Those mentioned are granted a monthly subsidy, to cover a part of their housing expenses, only if they present a set of documents justifying their compliance with this form of financing.

Regularly, the quantum of the allocation is the same with that of the students living in the hostels of their school, established by order of the ministry of education, research and youth.

No. of requests (Nsol) =2

20561028212

1

=×=×∑=

soli

i NC

Grounding the necessary funds for the scholarships of the Romanian students

for a university Table 2 (RON)

CODE ROW 2007 TOTAL row( 02+06+10+14+18+22 ) 5,641,928.00 1. Students row ( 03x04x05 ) 02 4,250,000.00 a) no. of scholarships 03 425 b) average monthly quantum of the scholarship -RON- 04 1,000.00 c) no. of months for which the scholarship is granted 05 10 2. Students from the post-academic education row (07x08x09) 06 1,344,000.00 a) no. of scholarships 07 112 b) average monthly quantum of the scholarship -RON- 08 1,000.00 c) no. of months for which the scholarship is granted 09 12 3. Scholarships for the rural environment row (11x12x13) 10 40,200.00 a) no. of scholarships 11 10 b) average monthly quantum of the scholarship -RON- 12 402.00 c) no. of months for which the scholarship is granted 13 10 4. Scholarships for Olympic contests row (15X16X17) 14 7,728.00 a) no. of scholarships 15 2 b) average monthly quantum of the scholarship -RON- 16 322.00 c) no. of months for which the scholarship is granted 17 12


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Grounding the necessary funds for the scholarships of the students studying in Romania for a university

Table 3 (RON)

CODE ROW 2007 TOTAL row (02+06+10+14+18+22+26) 820,558 1. Students row (07x08x09) 06 546,750 a) no. of scholarships 07 450 b) average monthly quantum of the scholarship -RON- 08 121.50 c) no. of months for which the scholarship is granted 09 10 2. Students from the post-academic education row (11x12x13) 10 206,675 a) no. of scholarships 11 126 b) average monthly quantum of the scholarship -RON- 12 136.69 c) no. of months for which the scholarship is granted 13 12 3. Foreign Ph.D. students, extramural studies row (15x16x17) 14 4,101 a) no. of scholarships 15 3 b) average monthly quantum of the scholarship -RON- 16 136.69 c) no. of months for which the scholarship is granted 17 10 4. Practical activities, students from the Republic of Moldova row(19x20x21) 18 5,225 a) no. of scholarships 19 43 b) average monthly quantum of the scholarship -RON- 20 121.50 c) no. of months for which the scholarship is granted 21 1 5. Months specialization scholarships rows (23x24x25) 22 1,367 a) no. of scholarships 23 10 b) average monthly quantum of the scholarship -RON- 24 136.69 c) no. of months for which the scholarship is granted 25 1 6. CEEPUS scholarshiprs row (27x28x29) 26 56,440 a) no. of scholarships 27 34 b) average monthly quantum of the scholarship -RON- 28 1,660.00 c) no. of months for which the scholarship is granted 29 1

*) according to the legal provisions, the quantum of the scholarship for a foreign student is 50 USD, and for a foreign Ph.D. student 56.25 USD. The basis course is 1USD = 2.43 RON; 1 EUR=3.28

2.5. Grounding the necessary funds for transportation facilities Presently, the apportionment of the budgetary allocations related to transportations

facilities for students was based on a series of general criteria, as the geographical areas, the structure of the academic learning institutions, the peculiar characteristics of the transport system form the academic centers, other specific criteria. According tot the CNFIS, these are the area of the academic center, the agglomeration of the academic centre, the diversity of the urban transport networks, and the existence of the academic campus.

According to the current legal provisions, the students of the public and private accredited private academic institutions, regardless the educational form, the domicile and the place where they are studying are potential beneficiaries of these transport facilities (until recently only the students from the public sector – without taxes have enjoyed these facilities).

The apportionment of the sums allocated for transport is made based on some weighting quotients, established by the CNFIS, together with the specialized directorate of the ministry of education (Directorate for Financing the Academic Education), on a historical basis and with actual corrections, in terms of requests from the universities and of the level of correspondent budgetary execution of this chapter of expenses. The main argument for distinction is the cost of the transportation ticket in a certain locality (i.e. for Bucharest, the price of the all-lines ticket in Bucharest is 40 RON, while in Constanta is 80 RON).


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The percentage for clearing the tickets varies from an university to another, being influenced by the specific local conditions, in which interferes the clearing mechanisms used by the universities.

The CNFIS methodology for grounding the funds for transportation facilities is difficult and requires a lot of time, so we propose another mode of financing within the “Conclusions and recommendations” section.

2.6. Grounding the necessary of funds for capital expenses In order to request funds, the university must perform analyses, presented en detail in

analytical documents, based on specific criteria for each category of works, as follows: - criteria and priorities for allocating the funds for capital repairs works, as follows: • Objectives started in previous years, aiming at finishing and putting them into order; • The functional importance of the space subject to intervention; • The importance of the area in which the building is located (central urban areas,

historical center); • The status of historical/architectural monument of the building subjected to intervention; • The contribution of the universities, with proper income, at the completion of the

funds allotted from the national budget for finishing the works; - Criteria and priorities of allocating the funds for the reinforcement works, as follows: • Objectives started in previous years, aiming at finishing and putting them into order; • Emplacements in area with high seismic risk; • Imminent collapse danger; - the rehabilitation of education spaces – they consists in rebuild, establishments and

partial/total improvements (internal and external), as well as technical-urban works (rehabilitation of sanitary installations, faience plaques, sandstone covering, replacement of sanitary objects, rebuilding installations etc.);

Once the grounding documents were approved, for all the categories of funds, the university will sign an institutional contract and a complementary contract according to the Law of Education no. 84/1995 republished, with subsequent updates and completions.

3. Conclusions and recommendations

3.1. Financing the academic educational entities on a program-based approach The strategic priorities and the creation of an integrated learning system which is supposed

to facilitate the implementation of the decisions at national level constitutes the main reason which imposes the initialization of a strategic planning system based on the budgetary realization through programs, as public policies at a central level. This system allows the budgetary planning in terms of the content of the policies, as well of the place these policies are occupying on the national strategy’s agenda of priorities. Also, the realization of the budget allows the inclusion of its process within the larger framework of the multi-annual programming of the expenses, being taken into consideration both the current and the investment expenses.

For the academic learning institutions it is necessary to define the purpose of an university, which consists in offering educational services, meaning the educational process, the scientific research activity and a series of specific institutional activities.

The judgments which stay at the basis of managerial actions leads to the fact that the university is conceived as a conservative institution, which is not based on the market realities, not being an innovative institution, adaptable to the demands of the market, being more likely preoccupied to realize the parameters related to the increase of the financing and


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not to improve the quality of the processes it runs and the services it offers in order to realize a finished product, the student, competitive on the labor market.

The most frequent errors appearing in the approach of an university are the confusion between the quality management either with the academic accreditation, either with the identification of the university inside the legislative plan of the learning institutions. Based on this, we may ask ourselves who are the customers of the university and who are the beneficiaries of the academic educational system. We can talk of two categories of clients:

- internal clients – directly participating in the educational process: the leadership of each university, the didactic and research personnel, the auxiliary didactic personnel, the administrative personnel, the students.

- external clients – beneficiaries of the educational services offered by the university: the economic agents and the government structures.

Starting from these, we propose that the financing of the universities to be realized on a program-based approach, programs which would have as finality quantifiable indicators of efficiency and results based on the performance of the students at graduation and the institutional performances. In our opinion, this kind of program, applicable to the chosen university, would have the following contents:

Financing program Efficiency indicators - number of graduate students from the total number of students; - the percentage of the students employed during the first year of graduation from the

total number of students; - number of students of the university implied in inter-academic exchanges from the

total number of students; - total number of master students from the total number of students; - number of external students accepted from the total number of students; - the percentage of professors and senior lecturers in the total number of teachers; - number of foreign Ph.D. students from total number of Ph.D. students; - percentage of proper income in total funds; - average expenses with scholarships; - average expenses per housed student; - average expenses from the basic financing per equivalent student (RON/equivalent student); - average expenses for transport per physical student (RON/student). Result indicators Number of students employed during the first year after graduation; Number of prizes obtained at national scientific sessions; Number of prizes obtained at international scientific sessions; Number of students involved in inter-universities exchange; Number of external students accepted; Number of the research projects of the teachers; Number of foreign Ph.D. students; Some of the indicators will be completed in by the students when their diploma is

emited, one year after graduation. We propose that the whole academic learning system to be sustained by taxes, the

state to allocate to the universities funds in terms of their social security policy followed by the executive and the demands of the labor market, established by the ministry.

Following this, the funds would be allocated based on the proposed program, keeping the actual equivalent criteria for students – domain-based – as elaborated by the CNFIS.


408

408

3.2. Grounding the necessary funds for transport facilities By analyzing the current situation and the CNFIS proposals, we can make the

following affirmations: a) presently, following the notifications from the universities based on the used formulas,

the funds allocated for transportation facilities are not enough for some universities; b) even if CNFIS proposes the improvement of the financing procedures, we suggest

that the Ministry of Education, Research and Youth to grant money in advance to the universities according to their requests, and at the end of each month, the universities would present the justification of the cleared sums, because there are normative acts which presumes the mandatory clearing. The clearing must be performed at university level.

Grounding of funds at the „Transilvania” University of Brasov will be performed according to the following table:

Tickets

Nr. Crt. City

Physical students day-

school budget and tax

per center

Physical students day-

school budget per

center

All lines

50% reduction granted by the

transportes 1 line 2 lines

Average allocation (RON)

ANNUAL ALLOCATION(RON)

Total allocation (RON)

A B 1 2 3 4 5 6 8 9=8*12(months) 13=9*2

1 Brasov 17,324 10,966 70 ron 0 ron

30 ron 50 ron 37,50 450.00 4,934,700

3.3. Tracking during the time the mode of conception for the budgets of the public

institutions, we find two negative aspects, that we recommend to be eliminated: - mostly, inside the budget proposals for the following years there are used figures

from the budget of the previous year, corrected with the inflation and, eventually, a certain percent for increase. This practice concludes at the end of the year an artificial phenomenon known now as a surplus of funds which favors the making of a large amount of expenses without any efficiency criteria, being afraid of the inevitable budget reductions. Such kind of action misses any kind of strategic sense and always, in this kind of situations, we may state, without any reserve, that in the link between the financial provision and the current situation a rupture has occurred, which is an inconvenient that might be put aside, by a liberty of moving the funds inside the budget of a credit holder, in order to achieve its objectives.

Another aspect is the political influence factor which impacts on the budget, which usually appears in the years preceding elections or in time of acute social crisis.

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